Will Capital Market Act Take Effect?
By Yoon Ja-young
Staff Reporter
The Capital Market Consolidation Act, expected to cause a big bang in the financial industry, is scheduled to go into effect from Feb. 4. Only a few days ahead of its implementation, however, controversy is still ongoing. Some critics point out that it should be given a second look at amid the global financial market chaos. Others show concern that its implementation, lacking full preparation, will result in an outflow of national wealth.
The act consolidates 14 capital market-related laws, such as the securities and futures exchange acts, into one, demolishing walls in the financial industry and realigning them into bank, insurer, and financial investment businesses incorporating securities and futures companies, asset management firms and similar entities. The grand design of the act is that these financial market players will develop into global investment banks (IB) following overall deregulation in the market.
Fall of US IBs
Pessimists, however, are getting support after the fall of the global IBs Bear Sterns and Lehman Brothers, which the country took as models, saying the deregulation isn't a cure-all. Lee Dong-gul, former head of the Korea Institute of Finance (KIF), said on a number of occasions that the act should be overhauled if the U.S. IB model, based on leveraging, is failing.
``There has been reconsideration and restructuring in financial systems worldwide following the fall of global IBs. The government, however, is enforcing strong deregulation, which is globally unprecedented,'' the Korean Financial Industry Union said in a statement.
``With the implementation of the act, derivative products, which caused the global financial market tsunami, would be released on the local market without limitation,'' the union said, claiming the act was adopting the self-regulatory system that proved to be a failure in developed countries.
Lee Seung-joon, a research fellow at the Korea Insurance Research Institute, said the self-regulatory systems in the United Kingdom and the United States, which enhanced effectiveness and cut regulatory costs, worsened the financial crisis by failing to systematically check soundness. He said thorough supervision should follow the deregulation.
The United States and other financial powerhouses, in fact, are trying to bolster their financial regulatory systems.
However, the government and supporters of the act say that the fall of global IBs doesn't mean that the act should come to a halt. IBK Securities CEO Im Kee-young said in an interview with The Korea Times that the problem was in management rather than in the model itself. ``I think we have a way to go to improve ourselves before mentioning the pros and cons of the U.S. model,'' Im said, explaining that the problem was inadequate supervision and excessive leverage, not the IB business itself.
Preparation in Haste
Another concern is that both the regulator and the industry aren't fully prepared for the implementation of the act. On top of the confusion and possible damage to investors, some fear that it would result in a leakage of national wealth.
The National Assembly passed the act Jan. 13, some 20 days ahead of the implementation, and subordinate regulations haven't fully changed to suit it.
The Korea Stock Research Institute pointed out that while the Capital Market Consolidation Act is based on a negative system that lists prohibited products and allows all others, some subordinate regulations are still based on a positive system that lists those allowed and bans all others.
Securities companies are also lagging behind, by not having completed organization restructuring sufficiently to follow regulations regarding conflicts of interests.
Some experts show concern that only foreign players, equipped with financial technology and investor protection measures, could reap the fruits of the act, while local players aren't ready.