[At-Risk Public Offering Funds]②Will Key Benefits Like Tax Incentives Be Missed Again?

Financial Services Commission Reviews IPOs of Public Funds Despite Industry Opposition
Asset Management Sector Calls for Long-Term Fund Tax Benefits

[Asia Economy Reporter Lee Seon-ae] Financial authorities have stepped in to revive the public offering fund market, which is currently in crisis. Although they introduced activation measures such as implementing a performance-based management fee system to improve the returns, identified as the cause of the stagnation, the market showed no signs of recovery, prompting the preparation of additional measures. According to the Financial Services Commission and the financial investment industry, the Financial Services Commission reported the "Comprehensive Plan to Enhance the Competitiveness of Public Offering Funds" as a major policy task in the "2023 Business Report" on the 30th of last month, as part of the advancement of the capital market.

However, specific measures are expected to face difficulties during negotiations due to conflicting interests between the authorities and the industry. The Financial Services Commission plans to announce the measures within the second half of the year. First, the Financial Services Commission will form a task force (FT) together with the Korea Financial Investment Association and the Korea Exchange to devise a comprehensive plan.

The activation plan is expected to include rationalization of public offering fund fees and compensation systems, as well as improvement of returns. This is an additional measure following the activation plan announced in August last year. At that time, the Financial Services Commission announced a revision of the enforcement decree to revitalize public offering funds. It made it mandatory for asset management companies to invest their own capital (seeding investment) when setting up funds. This measure strengthened management responsibility by requiring asset management companies to invest at least 200 million KRW of their own assets together. A performance-linked management fee system was also introduced. This system measures fund management performance against a benchmark on a quarterly or semi-annual basis and calculates and collects management fees symmetrically within a certain limit if the performance exceeds or falls short. This was based on the judgment that it is necessary to build customer trust through improved returns. Small-scale funds (with a principal amount under 5 billion KRW one year after establishment) were also eliminated. This was to concentrate management capabilities on funds with many investors by removing funds that were virtually neglected. However, despite these measures, the market did not warm up.

One of the measures being considered to revitalize public offering funds is the "listing of public offering funds (internalizing over-the-counter funds)." This means listing funds that were traded through bank and securities company channels on the Korea Exchange so that they can be bought and sold like exchange-traded funds (ETFs). Closed-end public offering funds are already listed on the KOSPI market, but this plan aims to allow general public offering funds to be traded like ETFs. Discussions will be held with the Korea Exchange and the Korea Financial Investment Association on this matter.

The Korea Financial Investment Association also shows determination to revive the stagnant public offering fund market this year and lead the revitalization of the capital market. At his first press briefing after taking office in January, Seo Yoo-seok, chairman of the Korea Financial Investment Association, stated, "We will revive the public offering fund market and actively propose long-term investment tax benefits." The Korea Exchange has also internally concluded that listing public offering funds is possible. Currently, in the U.S. market, it is possible to convert existing mutual funds (public offering funds) into ETFs and list them, and a consensus is forming in the domestic market as well.

However, it is uncertain whether the market will respond positively even if such activation measures are introduced. What the industry most desires is tax benefits. Compared to direct investment, funds inherently have longer investment periods due to their product characteristics, and there is a claim that these characteristics should be reflected in the tax system as well. Although an enforcement decree revision was announced to revitalize the market amid the continued stagnation of public offering funds, the market has rather become more stagnant, leading to the judgment that the existing measures are insufficient.

A senior official of the Korea Financial Investment Association emphasized, "Just as public offering funds were revived in the past through tax-advantaged savings, drastic tax benefits are necessary," adding, "It seems difficult to revitalize the market through other institutional improvements alone." Choi Seok-won, head of the Knowledge Services Division at SK Securities, said, "To revive public offering funds, unnecessary procedures at subscription and redemption should be simplified, and an environment encouraging long-term investment should be created."

However, the possibility of including tax benefits in the Financial Services Commission's current activation plan is slim. Tax benefits are a matter for the Ministry of Economy and Finance to decide. Moreover, tax benefits for long-term stock investments are only just being discussed. The conclusion on whether to provide tax benefits to long-term stock investors must be reached before discussing them for public offering funds. A financial investment industry official expressed concern, saying, "There are limits to the task force consisting only of the Financial Services Commission, the Korea Exchange, and the Korea Financial Investment Association," and "Moreover, it is unlikely that conclusions on tax benefits will be reached before next year's general election, so it is doubtful whether a more advanced plan than last year's public offering fund activation plan will emerge."

The plan to list public offering funds is also expected to face difficulties. Resistance from traditional distributors such as banks and securities companies is anticipated, making negotiations challenging. The industry expects that even if public offering funds recover, the influence of the ETF market will grow further, encroaching on the public offering fund market. Such signs are already evident in the U.S. market. Bloomberg has estimated that over the next ten years, about 1 trillion dollars will flow into the ETF market due to outflows from mutual funds. A Financial Services Commission official said, "We will gather industry opinions and adopt specific measures to enhance the competitiveness of public offering funds," adding, "Through a comprehensive plan, we will expand the investor base of public offering funds."