[The Editors' Verdict] The Legitimacy and Loopholes of Regulation

A Socially Necessary Boundary to Uphold
Must Examine for Side Effects During Implementation

One of the slogans that is routinely shouted when a new government takes office is regulatory reform. Various administrations have attempted to tear down regulatory barriers with flashy phrases like "a stone in the shoe," "a sandbag," "a thorn under the fingernail," and "a utility pole." So what was the conclusion? When the next government takes office and looks back, there are many cases where regulations actually increased under the previous administration.

Regulations are created to realize various public values such as the life and health of the people and fair competition. The Organisation for Economic Co-operation and Development (OECD) defines regulations as measures that should promote the development of the national economy and the welfare of the people, and that should realize a desirable economic and social order.

At first glance, the OECD’s definition makes regulations seem indispensable, but there are few things as disliked as regulations. Therefore, when circumstances change and the necessity disappears or when regulations become inefficient in achieving their goals, or when easing regulations is expected to increase public benefits or expand corporate autonomy, regulations are often relaxed, whether slightly or significantly.

The easing of regulations related to Contracts for Difference (CFD) products, which came under scrutiny following the stock price crash triggered by Soci?t? G?n?rale (SG) Securities, was such a case. The regulatory barriers on CFDs were lowered to increase public benefits (by easing the requirements for individual professional investors, providing alternative means for short selling, etc.) and to expand corporate autonomy (by activating new revenue sources for securities firms).

The results are well known. The key figure in this incident, Ra Deok-yeon and his associates, abused CFDs as a major tool for stock price manipulation. As this fact became known, financial authorities hurriedly overhauled regulations related to the individual professional investor requirements. They reverted to the pre-2019 standards, significantly raising the threshold for individual investors to trade CFDs. Securities firms, which have no choice but to heed the authorities, rushed to suspend new CFD transactions.

This is like locking the barn door after the horse is stolen. If the warning signals related to CFDs that sounded several times over the past few years had been carefully examined for problems, Ra Deok-yeon and his group would not have been able to gain unfair profits, and the resulting bill would not have come due. Whenever an incident occurs, the problems are always the uniform application of regulations regardless of circumstances and the complacency or irresponsibility of not tracking and correcting side effects after applying or easing regulations.

There are also side effects caused by not applying existing regulations accurately. Regarding the allegations that KB Securities and Hana Securities committed illegal acts in the operation of Money Market Wrap (MMW) and trust products, a contentious issue is the ambiguous evaluation criteria for bonds included in wrap and trust products. The authorities argue that the problem lies with the securities firms’ wrongful business practices, not with the evaluation standards themselves.

However, because regulations were not applied accurately and ambiguous attitudes were taken depending on market conditions, there are rumors that securities firms arbitrarily applied their own standards in their operations. It is pointed out that the authorities themselves created regulatory blind spots or loopholes. Although the authorities say they will investigate the securities firms suspected of problems, it takes two to four weeks per firm, so it is doubtful whether the inspections will be completed within this year.

Regulations created out of social necessity are fundamentally not evils to be eliminated but virtues to be upheld. First, it is important to apply them properly. Next, it is necessary to continuously monitor whether there are side effects or problems during the application process. If circumstances or conditions change in the meantime, it is desirable to revise or abolish them accordingly. Of course, indiscriminately cutting them down like mowing grass is problematic.