[Annoying Fees for Investors]② "Deposit Usage Fees Considered as Costs"... Ambiguous Regulations Encourage Money-Making Practices

Only One-Quarter of Deposit Income Paid to Customers
Regulation Allowing Securities Firms to Decide Arbitrarily Is the Cause
Guidelines and Comparative Disclosure on Profit Distribution Needed

According to data submitted by the Financial Supervisory Service to the office of Representative Yang Jeong-suk of the National Assembly's Political Affairs Committee, the deposit interest rates earned by 30 domestic securities firms through Korea Securities Finance Corporation over the past four years ranged from a high of 1.94% to a low of 0.80%. In terms of amounts, the profits were 451.3 billion KRW in 2019, 441 billion KRW in 2020, and 501.2 billion KRW in 2021. Especially during last year’s interest rate hike period, they earned 1.0735 trillion KRW in profits, totaling 2.467 trillion KRW over four years.

In contrast, the usage fee rates paid to customers who deposited funds are at a negligible level in the 0% range. The usage fee rate varies depending on the individual’s deposit amount and interest rate. From the end of 2020 through last year, if the deposit amount was less than 500,000 KRW, the average usage fee rate was 0.1?0.2%; for 500,000 to less than 1,000,000 KRW, it was 0.2?0.3%; and for amounts over 1,000,000 KRW, it averaged 0.2?0.4%, staying around 0.2%. Considering that securities firms earned deposit interest rates of 0.8?1.94%, the proportion returned to customers was about one-quarter. The amounts paid by securities firms to customers for deposits were only 173.9 billion KRW in 2019, 123.5 billion KRW in 2020, 102 billion KRW in 2021, and 197 billion KRW in 2022, totaling just 596.5 billion KRW over four years.

Deposit Management Yield in the 3% Range, Usage Fee Rate Below 1%

According to the 'March 2023 Trust Management Committee Meeting Materials' from Korea Securities Finance Corporation, the operating yield of the securities investor deposit trust in February reached 3.408%. Even after deducting Korea Securities Finance’s management costs and trust fees, the profit rate was 3.341%. Due to the impact of interest rate hikes, the trust yield increased by more than 1.5 percentage points compared to one year ago (1.8%). The Trust Management Committee expects the trust yield to remain around 3.3% this month as well.

The usage fee rates of securities firms for deposits are low. Based on a deposit of 1,000,000 KRW, the highest usage fee rate is applied by Shinhan Investment Corp. at 1.05%. This translates to about 8,000 KRW in interest returned to the customer after deducting 15.4% tax on 10,500 KRW. Toss Securities (1%) and KB Securities (1.03%) also recorded interest rates in the 1% range. Following them are Mirae Asset Securities (0.75%), Daol Investment Securities (0.55%), NH Investment & Securities (0.5%), BNK Investment & Securities (0.4%), Hanwha Investment & Securities (0.4%), Kyobo Securities (0.4%), and SK Securities (0.4%). Shinyoung Securities pays a minimum deposit interest rate of 0.1% even to customers with deposits under 500,000 KRW.

Calculating Minimal Usage Fees Under the Pretext of Ambiguous Costs

The reason securities firms have been able to profit from interest by using customers’ money is that they can arbitrarily set the standards for paying deposit usage fees. According to Article 4-46 of the Financial Investment Business Regulations, financial investment firms must pay investors the usage fee for deposits according to the calculation standards and payment procedures set by the Korea Financial Investment Association. The deposit usage fee should be reasonably calculated considering operating profits and incurred costs. Ultimately, securities firms can set this arbitrarily, enabling them to earn trillions of KRW annually.

The problem lies in the ambiguous concept of costs calculated according to the securities firms’ 'reasonable methods.' Article 3-7 of the Korea Financial Investment Association’s regulations on the business and operations of financial investment companies stipulates the procedures for calculating and changing deposit usage fee rates. Paragraph 2 states that "financial investment companies must set the payment standards for deposit usage fees by considering operating profits generated from investor deposits and all direct and indirect costs related to investor deposits." These costs include deposit insurance premiums, supervisory contributions, payment settlement-related costs, labor costs, IT costs, and other deposit-related expenses of the financial investment company. Changes to payment standards can be made by securities firms, with the only regulatory requirement being prior reporting of such changes to the association.

An industry insider commented, "While IT and payment settlement costs and related labor costs are understandable, it is excessive to charge deposit insurance premiums and supervisory contributions when Korea Securities Finance safely stores the deposits." Kang Hyung-gu, Director of the Financial Consumer Federation’s Financial Department, said, "Deposits cannot be seen as profits earned through securities firms’ good management, so it is appropriate to return about half to customers. Currently, deposit usage fee rates are even lower than short-term bank deposit or demand deposit (checking account) interest rates."

Need for Profit Distribution Guidelines or Disclosure System by Securities Firms

The task force (TF) being prepared by the Financial Supervisory Service plans to create guidelines on profit distribution to ensure that customers, the rightful owners of deposits, receive appropriate returns. There is high expectation that this will break away from the usage fee rate practices that are too detached from market interest rates. Representative Yang Jeong-suk emphasized, "Securities firms earned nearly 2 trillion KRW in risk-free profits over four years using customers’ deposits. It is necessary to establish profit distribution guidelines or a disclosure system by securities firms to ensure that profits are appropriately returned to the deposit owners."

However, excessive expectations should be avoided. From the securities firms’ perspective, significantly raising deposit usage fee rates is burdensome. Looking at the brokerage revenue composition, the order is credit transaction interest rates, trading commissions, and deposit usage fee rates. Although deposit usage fees do not constitute a large portion, if retail sector profits shrink further, concerns about performance may increase. A representative from a major securities firm said, "Small and medium-sized securities firms find it difficult to generate meaningful profits from corporate finance and are relying on credit loan interest rates and deposit business as trading declines." Lee Hyo-seop, a senior researcher at the Korea Capital Market Institute, said, "I understand that securities firm CEOs have started improvement efforts. If comparative disclosures of deposit usage fees and credit loan interest rates by securities firms are made, firms themselves will be able to adjust rates to reasonable levels."