New Leader to Benchmark London for Financial Growth

By Park Hyong-ki

Staff Reporter

Banks, securities and insurance companies have long been operated under protective regulatory environment guaranteed by the financial authorities without much competition against each other or their foreign peers.

But that is about to change as President Lee Myung-bak pushes the nation to be foreign and business-friendly through deregulation.

His further deregulation efforts have been clearly indicated to the financial industry which already faces an overhaul through the Capital Market Consolidation Act (CMCA) passed last year by the National Assembly to increase competition and efficiency.

Realizing that the financial industry must serve as the country's next growth engine besides manufacturing amid a fast ageing society, President Lee promised financial chief executives he would support the industry by eliminating unwanted barriers.

Sakong Il, Lee's close confidant who will spearhead the president's economic pledges, emphasized the need to ``benchmark London'' should the financial market desire to advance. Chairing a presidential council promoting national competitiveness, Sakong is expected to coordinate deregulation to the likes of London, the world's leading financial center, as he mentioned that Korea should adopt the London-style principle-based regulation rather than continuing to supervise the market based on rule-based regulation. ``We need to balance the two systems evenly,'' said Sakong.

London's Financial Services Authority (FSA) started to supervise its market in such a way in 2000 when the United Kingdom passed the Financial Services and Markets Act, which Korea's CMCA is closely modeled after.

``Its principle-based approach has proven to be highly flexible and efficient, boosting the city to become the world's financial leader in many things such as derivatives and initial public offerings,'' said the Korea Institute of Finance.

It noted the rule-based system, on the other hand, has proven to fail in preemptively countering financial fallout, adding that it cost a lot to maintain such regulations, and was not the right kind of system for a rapidly changing global climate.

The principle-based system puts the importance on outcomes, while regulators give total independence or freedom to financial firms on how they operate toward reaching their goals. The rule-based is time consuming as regulators have to constantly watch companies on whether they are following all the specific rules for specific businesses, the institute said.

The FSA operates with 11 main principles concerning company management, customers' interest and communications with clients. Since its adaptation of such system and the Financial Services and Markets Act, the U.K. managed to raise the competitiveness of its financial industry, increasing its GDP growth contribution to about 8.6 percent in 2005 from 6.6 percent in 1995. Korea's financial industry accounts for about 7 percent of GDP, according to the Financial Supervisory Service.

The Global Financial Centers Index by the City of London shows that London tops as the financial center, citing that it rates well with regard to ``the availability of skilled people, regulation and market access.'' New York and Hong Kong follow London. Seoul ranked the lowest among Northeast Asian capitals of Japan and China. Tokyo ranked 10th; Shanghai ranked 30th; and Seoul 42nd.

It comes as no surprise that President Lee is trying to move faster in promoting competition and business-friendly policies through deregulations as statistics show Korea's poor standings.

But experts say it will take a lot more than deregulation to boost foreign direct investment or to become a global financial center.

The U.S. news magazine Time points out that cities such as New York, London and Hong Kong ― or the so-called ``Nylonkong'' ― were able to achieve such world-class status as they have rich cultural diversity and talented human resources, attributable to globalization.

High connectivity and social openness deriving from being port cities have helped the three cities make an ``economic shift'' to the financial services sector.

``The network of international trading and personal contacts that shape New York, London and Hong Kong facilitate their key industries. They are messy agglomerations of talent and culture. That is how they attract men and women in the financial sector who could choose to live anywhere,'' said Time.

phk@koreatimes.co.kr