Global Financial Crisis Shakes Planned Capital Market Act
By Lee Hyo-sik
Staff Reporter
A controversy surrounding the enforcement of the Capital Market Integration Act is growing in the wake of the demise of Wall Street-based investment banks and the ongoing global financial market meltdown.
Government officials and other proponents are saying that the act should go into effect as planned in February next year, claiming that now is the right time to strengthen the competitiveness of the domestic financial market and nurture more competitive, diversified financial firms while U.S. and European companies are struggling with the ongoing market turmoil.
However, opposition party officials and some private economists are arguing that the integration law is modeled after the U.S. financial system, which has caused the ongoing global crisis. They say Korea should take more time to review it and make necessary revisions to enhance the regulatory regime concerning activities of financial firms, including hedge funds and derivatives investments.
The Capital Market Integration Act, approved by the National Assembly in July last month, is primarily designed to break down barriers between banks, securities firms and insurers in a bid to promote competition and thus strengthen the competitiveness of the overall financial industry. It seeks the consolidation of 11 rules and regulations in the capital market by function, not by different types of financial entities.
Securities firms will likely be the biggest beneficiaries, as it will offer an opportunity for them to diversify income sources, making greater efforts to generate earnings from asset management, and merger and acquisition (M&A) consulting services.
Under the act, brokers will also be allowed to provide payment settlements enabling accountholders to transfer money and pay credit card and other bills through securities accounts. It was the main culprit behind intense conflicts surrounding the act before the parliamentary passage, as the Bank of Korea and commercial banks fiercely opposed allowing brokerage houses to offer cash transaction services. They claimed that it would undermine the soundness of the nation's payment settlement system.
The act will also adopt a negative system for product development, under which all investment products are allowed unless specifically prohibited. The change will enable market players to develop and introduce many advanced investment products, including hedge funds and derivatives.
Hong Young-man, director general of the capital market department at the Financial Services Commission (FSC), told The Korea Times that the act will not increase financial market risks, as suggested by some opponents, adding financial firms will be more heavily obliged to protect investors' interests and practice better risk management.
``Parts of the act have already gone into effect. Many financial firms have been working for months to deal with changes after the act takes effect. If we postpone the enforcement, it will create huge confusion. Besides, if we backtrack from putting it into practice, the government will lose its credibility in the international community,'' Hong stressed.
Most foreign finical professionals echoed his view, saying that the capital market act is crucial to the future of Korea's financial market.
In a recent interview with The Korea Times, John Walker, chairman of Macquarie Group Korea, said withdrawing from capital market liberalization would hamper the development of the local financial market.
``Under the act, financial firms will be able to better diversify their business portfolios, rather than heavily rely on net-interest margins and commission-based businesses, improving the bottom line and boosting competitiveness. They'll also better manage risks,'' he stressed.
However, opposition party lawmakers and some economists are insisting that the enforcement of the law should be postponed.
You Jong-il, a professor at the Korea Development Institute (KDI) School of Public Policy and Management, told The Korea Times that the nation has plenty of time to review the market integration act and should make necessary changes to better cope with the changing international market situations.
``I am not sure whether early next year is the right time to enforce the law because we are in the middle of the biggest financial crisis since the Great Depression. It would be better if we saw how the market changes and then revised and enforced the act,'' You said.
Among other things, he pointed out that securities firms should not be allowed to have a payment settlement capacity, as brokers will not be regulated as heavily as banks under the act.
``Imagine how much more serious it would have become if defunct-Lehman Brothers were able to settle financial payments. The ripple effects of its bankruptcy would have been much greater,'' he stressed.
You then said the government needs to strengthen the regulatory system governing hedge funds and derivative products, which are the main culprits behind international financial market instability.