All About Capital Markets Consolidation Act

The Capital Markets Consolidation Act, which will take effect in 2009 after an 18-month grace period, is expected to have a giant impact on South Korea’s financial market.

Introducing the bill last February, first Vice Minister of Finance and Economy Kim Seok-dong said, “The scope of the changes brought by the Capital Market Act will be ten times bigger than that of the U.K.-based ‘Big Bang’ in 1986.”

The “Big Bang” refers to the financial reforms, such as eliminating barriers between banks and brokerages and opening the door to foreign financial institutions, implemented by the British government during Margaret Thatcher’s premiership in 1986. Its success has made London a world financial center.

The South Korean government expects that the abolition of barriers between financial institutions and other regulations will create its own versions of investment banks such as the Goldman Sachs Group Inc. and Merrill Lynch & Co., and promote a variety of financial products.

Promoting the Creation of Big Investment Banks-

There are three main points in the law.

First, financial firms will be allowed to cover and offer various services. So far, brokerages, futures, asset management, and investment trust companies did different work, but when the law comes into effect, financial investment companies will be able to cover all these services under one roof.

Second, deregulation will encourage the development of diversified financial products. They used to be listed under a “positive system,” which allowed only items specified by law, but under the new act, they will be listed under a “negative system,” which will allow all items except for some banned ones to be listed.

Third, the development of various financial products will enable customers to have broader choices for investment.

The fact that brokerages can perform payments is notable as well. Payments refer to services such as ATM deposits and withdrawals, bill payments, automatic payments, and credit card payments. Like a bank account, customers will be able to use these services with their brokerage account.

Accelerating M&As among Financial Institutions-

With the introduction of the act, the financial market is likely to become an arena dominated by the concept of the “survival of the fittest.”

Lim Jong-rok, a managing director of the Korea Securities Dealers Association, said, “Securities firms should either expand their size or have specialties like the online-focused Kiwoom Securities. Otherwise, they will die out.”

M&As are necessary for brokerages to increase their sizes, and potential sources for profits will be diversified by them as well.

As brokerages can cover payments that used to be dominated by banks, the competition between brokerages and banks to attract clients is expected to increase.

However, some critics point out that it will take quite a long time for the birth of a new giant investment bank since domestic securities firms that make profits largely from brokerage fees are not competitive.

ssoo@donga.com