[Inside Chodong]How to Prevent Securities Firms' 'Fee Tricks'...

Excessive Profit-Making by Securities Firms Amid Regulatory Neglect
Urgent Need for Comparative Disclosure and Transparent Measures

On the 17th, the article detailed how securities firms have been engaging in 'excessive money-making' through deposit usage fees, credit loan interest, and stock lending (loan transactions) commissions. The reaction after the article was published was intense. An individual investor expressed anger upon realizing that retail investors had been 'overcharged' by securities firms' fees. An executive from a securities firm voiced concern about the company being stigmatized as one that used trickery. An investor who sent an email found it hard to understand why this issue had been neglected until now and criticized the regulatory authorities for their tacit approval, urging them to promptly come up with improvement measures.

The deposit usage fee rates, which are far removed from market interest rates, and the unusually low stock lending fees applied only to individuals, as well as undisclosed information, are issues related to investor protection emphasized by financial authorities. Although there have been voices pointing out related problems, the regulatory authorities cannot be free from criticism for neglecting their national duty (Article 9 of the Financial Consumer Protection Act) until now. While enforcement may have been difficult, if the financial investment business regulations had been properly established to ensure comparative disclosure of deposit usage fees and stock lending commissions by securities firms, the unreasonable structure of being 'stingy when paying but generous when receiving' would not have been created. Furthermore, although the problem of the opaque structure (information asymmetry) of the stock lending market was already recognized, it is regrettable that the Financial Supervisory Service (FSS) has only now stepped up to take action.

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

Coincidentally, on the afternoon of the day the article was published, the FSS announced an unscheduled weekly reporting plan. It included the launch of a task force (TF) to improve securities firms' interest rate and fee practices, involving 14 securities firms and the Korea Financial Investment Association. The FSS's goal is to improve the calculation standards for deposit usage fee rates and discuss unified disclosure standards. They also plan to set inspection cycles for usage fees and prepare official forms. Regarding stock lending commission rates, they intend to review disclosure methods by securities firm and investor type. For credit loan interest rates, they will examine issues that run counter to interest rate cuts and derive improvement measures, as well as discuss strengthening disclosures. If the FSS properly implements countermeasures, securities firms will no longer be able to engage in 'excessive money-making.' That is, if the plan is carried out strongly as intended. The key is the regulatory authorities' willingness to improve and the securities firms' responsible management.

Borrowing money at low interest rates from Korea Securities Finance to provide high-interest credit loans may be natural in the context of capitalism. Excessive intervention by authorities may not be desirable. It could lead to controversy over government control. Securities firms' argument that lowering credit loan interest rates significantly would cause a balloon effect of increased leveraged investing (debt-financed investment) has some merit. Similarly, deposit usage fees cannot be arbitrarily pressured to rise to match the base rate when compared to products of similar nature, as they are already quite low.

The Korea Capital Market Institute pointed out that "comparative disclosure leading securities firms to rationally adjust interest rates themselves is the most desirable scenario." The Financial Consumers Federation criticized that consumers suffer because securities firms arbitrarily set fees individually. Therefore, they emphasized that the FSS should review whether interest rate levels are appropriate and transparently disclose them to investors as a solution. This is the same solution proposed by the Korea Capital Market Institute. If everything is transparently disclosed, the 'money-making structure' can gradually be improved. Ultimately, transparency is the most fundamental issue. The first step toward advancing the capital market is transparency. When market transparency is enhanced, investor protection is naturally strengthened.