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Around the Time of the Capital Market Act Enforcement

2009.02.17

The Financial Investment Services and Capital Market Act (hereinafter the "Capital Market Act") came into force on February 4, 2009. Due to the acceleration of the global economic recession that started from last year's financial crisis in the U.S., the Capital Market Act that was enacted to foster the global IB has struggled through many difficulties. There have been numerous amendments even before the law was enforced and an amendment that recommends the deferment of the Capital Market Act's enforcement has even been proposed. Due to the KIKO situation, an amendment that classified a listed corporation as an ordinary investor for the sale of derivatives products, which used to be classified as a professional investor unitarily in the past has been passed and enforced together. 
 
A change to a negative system regarding the financial product to promote the advent of various financial investment products has been made by the Capital Market Act. Such measure was intended for the development of various derivative products inside and outside the market. However, since such derivative products were indicated as the main cause of the global financial crisis, considerable doubts arose as to whether the advent of such various derivative products is desirable to Korea's financial system. 
 
Another major change following the Capital Market Act is that due to the extension of the scope of the financial investment work, a side job is allowed in full measure if it is classified within the scope of the financial investment work. Unlike in the past, such financial investment work is regulated under the same measure according to its functions. Particularly, a financial investment business entity can carry on investment dealing, brokerage business together with collective investment business (former asset management) under the Capital Market Act. Such combination of management of another business was not allowed under the Indirect Investment Asset Management Business Act, which was incorporated into the Capital Market Act. This has been controversial during the enactment process due to the conflict of interest considerations. 
 
In order to prevent the possibility of such conflict of interest, the Capital Market Act has implemented various types of measures to protect investors such as imposition of fiduciary duties, installation of the Chinese Wall, ban on holding more than one office, imposition of various regulation on conduct, establishment and operation of conflict of interest management systems, etc. However, above all, it is important that the financial investment business entities themselves make efforts to prevent the conflict of interest and win confidence of the market through such efforts. The entire business will suffer if one persists in short term objectives or creating profits. 
 
On the other hand, the Capital Market Act made clear that the financial investment shall be made on one's own risk and at the same time established new institutional measures to help investors make rational judgments. Before recommending or selling financial investment products, the financial investment business entities (i) shall confirm whether the investor is an ordinary investor or a professional investor; (ii) shall grasp information regarding the investment purpose, financial condition and the investment experience of the ordinary investor, etc. through interviews or questions before recommending investment to ordinary investors and shall receive written confirmation from such ordinary investors; (iii) shall not recommend inappropriate investment to such ordinary investors; and (iv) shall explain about the financial investment products when recommending investment to ordinary investors so that they may understand (so called, 'Know-Your-Customer Rule,' 'Suitability Rule'). In addition, conclusive judgment on false or uncertain matters, solicitation by real-time conversation such as visitation and telecommunications without a request for solicitation, and unsolicited calls are strictly prohibited. If such regulations on solicitation under the Capital Market Act are complied with properly, the sale of fund, which only used to take 10 minutes for the completion of the sale in the past, may take about an hour. However, in order to recover confidence of the market and for the system to be put into practice, such inconveniences must be endured. 
 
The implementation of the Capital Market Act does not automatically mean that the global IB will be fostered in Korea. Moreover, a developed financial market, which was the model and was referred to at the time of enacting the Capital Market Act, has failed in many ways. Nevertheless, it is unreasonable to disregard the last one and a half year period of preparation for the enforcement of the Capital Market Act and defer its enforcement without an alternative plan. The Act has come into force and whether the Capital Market Act will contribute to the development of the national economy by promoting fairness, confidence, and effectiveness of the capital market as set forth in Article 1 of the Capital Market Act depends on us. We should face up to the reality of the financial market and take note of the restructuring flow of the world financial system.

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