Metal loan case raises questions on regulators’ role
By Kim Jae-won
“When in Rome, do as the Romans do.”
This Western saying reflects a keen political observation at the time of Pax Romana.
So can the same logic be applied to Korea, when financial trading is concerned? After all, Korea is not the center of the moneyed universe.
One case that captures this question well is a recent probe by financial regulators about allegations that Standard Chartered First Bank Korea (SC First) has engaged in metal loans in violation of Korean regulations.
A metal loan is a financing service in which a financial company supplies metal to a corporate client on commissions.
Korea's bank regulations ban financial companies from earning profits from any metal or natural resources except for bullion by the principle of separation between finance and manufacturing industries.
The Financial Supervisory Service (FSS) said that metal belongs to the manufacturing industry, so a financial company should not be involved in the business.
“Commodities are part of the manufacturing industry. Financial companies are prohibited from engaging in the areas by law of separation between manufacturing and finance industries,” an FSS official told The Korea Times. Another official of the government said that metal loans are complicated derivative products, which are too risky to trade on the market.
Contrary to Korea’s ban on metal loans, many advanced countries allow them. Financial companies in the U.S. and U.K. can buy and sell commodities freely. Japan also removed a ban on metal loans in 2007.
Lenders say that metal loans can be a win-win strategy both for financial companies and manufacturers.
“Financial companies, which have abundant funds, can provide commodities for manufacturers, and receive commission for the service. What is wrong about that?” a source at a Korean bank said.
While the regulators are not confident about controlling this financial service it means a reduced opportunity for financial players. Granted, the regulators are expected to play the role of policeman upholding the law and order but at the same time that is not all that is expected of them. Their role should also go further to provide the best environment for businesses to flourish.
Of course, there is a rub over the two conflicting roles. The question is whether the FSS is sticking to its stated regulations at the risk of suffocating a spirit of enterprise among businesses.
Meanwhile, the financial watchdog has launched a probe into SC First and dispatched its investigators to the lender’s main office in downtown Seoul.
The FSS said that it plans to summon bank officials and determine the level of the penalty later. SC First declined to comment, citing the nature of the on-going probe. But an industry source familiar with the issue said that SC Commodity Group in London led the metal loan deal, and SC First helped it in marketing to Korean customers, mainly manufacturing corporations.