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FSC takes steps to raise competitiveness of public equity funds

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By Anna J. Park
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Financial Services Commission Vice Chairman Kim So-young speaks during a meeting to discuss ways to raise the competitiveness of public equity funds at the government complex in central Seoul, Wednesday. Key officials from related financial institutions, including the Korea Exchange, Financial Supervisory Service, Korea Securities Depository, and Korea Financial Investment Association attended the meeting. Yonhap

Financial Services Commission Vice Chairman Kim So-young speaks during a meeting to discuss ways to raise the competitiveness of public equity funds at the government complex in central Seoul, Wednesday. Key officials from related financial institutions, including the Korea Exchange, Financial Supervisory Service, Korea Securities Depository, and Korea Financial Investment Association attended the meeting. Yonhap

Gov't to spur growth of stagnant market

Financial authorities are spearheading a comprehensive overhaul of the nation's public equity funds system, with the explicit goal of elevating global competitiveness and catalyzing a fresh wave of growth in the industry.

A public equity fund, which includes mutual funds or exchange-traded funds (ETFs), is a type of investment fund that pools money from various investors to invest in a diversified portfolio of publicly traded stocks or equities.

According to the Financial Services Commission (FSC), the top financial regulator, on Wednesday, the public equity fund market in Korea has experienced a relatively sluggish expansion in recent years.

When excluding short-term money market funds (MMF) and exchange-traded funds, the entire size of the public fund market in the country stood at 100.2 trillion won ($76.5 billion) as of September last year, which marks a decline from 102.6 trillion won in 2022. In fact, the size has been decreasing steadily since 2015, when it stood at 114.2 trillion won.

The data indicates a positive trend in annual growth, when including both the MMF and ETF markets, reaching 315.4 trillion won in the fall of 2023 — a substantial increase from 221.2 trillion won in 2015. However, the numbers highlight the need to introduce effective changes to revive public equity funds, which remain outside the realm of the MMF and ETF markets.

Financial Services Commission Vice Chairman Kim So-young, third from right in the upper side, speaks during a meeting to discuss ways to raise the competitiveness of public equity funds at the government complex in central Seoul, Wednesday. Key officials from related financial institutions, including the Korea Exchange, Financial Supervisory Service, Korea Securities Depository, and Korea Financial Investment Association attended the meeting. Yonhap

Financial Services Commission Vice Chairman Kim So-young, third from right in the upper side, speaks during a meeting to discuss ways to raise the competitiveness of public equity funds at the government complex in central Seoul, Wednesday. Key officials from related financial institutions, including the Korea Exchange, Financial Supervisory Service, Korea Securities Depository, and Korea Financial Investment Association attended the meeting. Yonhap

Three-pronged approach to overhaul public funds

In his meeting with key officials from related financial agencies, including the Korea Exchange (KRX), Financial Supervisory Service (FSS), Korea Securities Depository (KSD), and Korea Financial Investment Association (KOFIA) on Wednesday afternoon, FSC Vice Chairman Kim So-young explained that the move is in line with the Yoon administration's consistent initiative to resolve the chronic "Korea Discount" — referring to the generally weak performance of listed Korean firms in the domestic stock market — to better protect investors' shareholder value in local stock markets.

"First off, the responsibilities borne by fund sales agencies, asset management companies and fund-related institutions will be significantly strengthened," Kim said during the meeting.

Currently, the sales commission of public equity funds is structured so that all sales agencies uniformly receive compensation from the fund assets. However, the vice chief of the financial regulator said that the government will introduce a new sales commission structure, under which sales agencies will directly receive sales commissions from investors, and the rates may vary among sales agencies within the legal limit of one percent. Performance-linked sales commissions will also be adopted based on a fund's performance. Asset managers' accountability for their alternative investments and ETFs will also be strengthened, with the introduction of a mandatory periodic assessment of their values.

"The FSC aims to stimulate innovation in public fund products by facilitating their trading on the listed market, similar to ETFs. This initiative is designed to minimize investment costs and improve trading convenience. Additionally, the government will activate protective measures for new products in the ETF market, encouraging the launch of innovatively designed products," Kim stressed.

Lastly, the FSC intends to spearhead infrastructure innovation by revamping the foundational legal frameworks of the fund industry. One notable change includes permitting fintech services to recommend public funds by comparing the performances of each fund.

Furthermore, the government aims to revisit the registration system for foreign funds. Previously, foreign funds were sold indirectly through an intermediary investment firm, and they were not subject to Korea's registration obligations. Such overseas funds will also be equally regulated as domestic public funds.

Hoping to expedite the implementation of the three-pronged appoach, actions that do not require legislative amendments will be implemented during the first half of this year, followed by the submission of necessary amendments to the Capital Market Act a the National Assembly during the second half of this year.