[Annoying Fees for Customers] ① Securities Firms Pocketed 2.4 Trillion Won with Clients' Money... Interest Only 596.5 Billion Won

Comprehensive Review of Securities Firms' Interest and Fee Charging and Payment Practices
TF Launching This Month... Revising Calculation Standards and Fee Rate Disclosures

The Financial Supervisory Service (FSS) plans to closely examine the payment and imposition calculation standards for securities firms' deposit utilization rates, credit loan interest rates, and stock lending commission rates. As criticism has arisen that securities firms are engaging in excessive 'money-making' through these fees (interest), similar to how banks profit from loan-deposit spreads, the FSS is hastening the launch of a task force (TF) to revise calculation standards and disclosure practices. The FSS, together with the Korea Financial Investment Association (KOFIA), will establish the TF within this month, involving domestic securities firms to comprehensively review the practices of charging and paying interest and fees and to derive improvement measures.

Domestic Securities Firms Earned 2.467 Trillion Won from Deposits Over Four Years

According to the Financial Supervisory Service, over the past four years, domestic securities firms earned 2.467 trillion won from customer deposits. In contrast, the interest paid to customers during this period amounted to only 596.5 billion won. This means customers received only a quarter of the profits. The net profit retained by securities firms reached a staggering 1.8 trillion won.

Customer deposits entrusted to securities firms are fully entrusted or deposited with Korea Securities Finance Corporation (KSFC). Under the Capital Markets and Financial Investment Services Act, KSFC invests these funds in stable bonds such as government bonds, local government bonds, and bonds guaranteed by financial institutions, and distributes the earnings to securities firms. Securities firms earn stable profits simply by entrusting or depositing customer deposits with KSFC without bearing any significant risk from deposit management.

Securities firms' 'money-making' methods are not limited to this. There are also credit loan interest and stock lending commissions. While paying customers a meager interest rate in the 0% range on their deposits, they charge nearly 10% interest on the money customers borrow. The same applies to stock lending. When borrowing stocks, individual customers uniquely receive very low commission rates (interest) in the 0% range. This has been possible because securities firms have been able to arbitrarily set all these rates.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is attending the 'FSS Governor-Securities CEO Meeting' held at the Korea Financial Investment Association in Yeouido, Seoul on the 2nd, delivering opening remarks. Photo by Yoon Dong-joo doso7@

Task Force to Be Launched This Month to Derive Improvement Measures

As this 'money-making' by securities firms became controversial, FSS Governor Lee Bok-hyun took decisive action. He warned securities firms, which have been fattening their profits through fee manipulation, to stop their 'excessive business practices.' This does not appear to be just a threat. The TF is scheduled to be launched this month. On the 17th, a senior FSS official stated, "Securities firms will participate in the TF, which will be organized by classifying firms into large, medium, and small categories. Once the composition is complete, we will immediately hold kickoff meetings and derive improvement measures." Seo Yoo-seok, chairman of KOFIA, who will play a leading role in this TF alongside the FSS, said, "We will seriously discuss reasonable calculation standards by collaborating with the industry (securities firms). We are hastening the launch of the TF centered on representative securities firms."

Many securities firms are expected to participate in the TF. Given the strong directive from the FSS, there is a prevailing atmosphere that firms must take an active stance. This atmosphere was clearly evident at a meeting between Governor Lee Bok-hyun and securities firm CEOs on the 2nd. During the closed meeting, Governor Lee demanded active improvements from securities firms regarding the TF, and Choi Hyun-man, chairman of Mirae Asset Securities, promised a significant reduction in credit loan interest rates. Other securities firm representatives also expressed their willingness to implement reductions. Governor Lee also urged special attention to be paid to deposit utilization rates. It is expected that securities firms will find it difficult to take a passive stance on this issue.

The TF is expected to be launched within this month. According to the FSS, the TF will first improve the calculation standards for deposit utilization rates and discuss unified disclosure standards. It will set inspection cycles for utilization rates and prepare official forms. Regarding stock lending commission rates, the TF will review disclosure methods by securities firm and investor type. For credit loan interest rates, the TF will examine issues that contradict interest rate cuts and derive improvement measures, including strengthening disclosure.

Authorities Neglected the Issue Until Now... Late Willingness to Improve Practices

The FSS views the biggest problem as the calculation standards for deposit utilization rates and credit loan interest rates not properly reflecting changes in market conditions such as the base interest rate. Securities firms pay very low utilization fees on investor deposits while charging high interest rates on credit transactions that have increased amid the stock investment boom. This is essentially a 'rubber band' standard tailored to the convenience of securities firms.

The issue related to customer deposits has been repeatedly raised. In fact, the supervisory authorities, which have neglected the matter until now, cannot easily evade responsibility. Accordingly, there is speculation that the FSS will tighten the reins on this TF. Yang Jeong-sook, an independent member of the National Assembly's Political Affairs Committee, pointed out, "Securities firms' profits are structured to benefit from larger deposit volumes and higher interest rates. Recently, with rising interest rates and increased deposit volumes, deposits have become a golden goose for securities firms."

High credit loan interest rates are also under scrutiny. Before the FSS pressured to curb interest profiteering, domestic securities firms' credit loan interest rates reached the 10% range. Credit transactions involve securities firms lending funds to customers for a certain period secured by securities collateral and charging interest. However, in calculating credit loan interest rates, firms excessively applied the base rate hikes. A senior official in the financial investment industry noted, "There is no set rule on whether to raise credit loan interest rates or deposit utilization fees first during interest rate hikes, but credit loan interest rates have always been raised first and significantly, while deposit utilization fees have only been slightly increased."

There are also tricks hidden in stock lending commissions. Currently, domestic securities firms do not disclose stock lending commission rates. The FSS views this as a weakness in investor protection. The problem is that securities firms pay different commissions when lending the same stocks to individuals, institutions, and foreigners. Of course, individuals receive uniquely low commissions. Another senior official in the financial investment industry said, "While borrowing money at low interest rates from securities finance to provide high-interest credit loans can be seen as a business characteristic, deposit utilization rates that are far removed from market rates and stock lending commissions uniquely low for individuals are issues from the perspective of investor protection." He added, "In fact, since the financial authorities have neglected their national duty (Article 9 of the Financial Consumer Protection Act) until now, they cannot avoid responsibility. This time, there seems to be a mood to properly fix these issues."