The Financial Supervisory Service will push to improve the system by imposing a blanket ban on transaction-amount-proportional events that could induce excessive trading. Based on future findings from an inspection of securities firms, it will immediately switch to on-site examinations and expand the number of targeted companies for sequential inspections.
The Financial Supervisory Service (FSS) said it will respond with the highest level of measures, including suspending overseas stock operations, if unlawful or improper acts by securities firms are found during examinations.
On the 19th, the Financial Supervisory Service (FSS) released materials on the interim results of an inspection of overseas investment practices and future response plans, saying it conducted on-site inspections of six top securities firms by overseas investment transaction volume and two top managers of overseas equity funds. The inspection was jointly carried out by the FSS and the Korea Financial Investment Association from the 3rd to the 19th of this month.
Through Nov., the overseas stock brokerage fee revenue of the top 12 firms by major overseas stock transactions totaled 1.9505 trillion won, a record high. Foreign exchange fee revenue reached 452.6 billion won in the same period. That is nearly double last year's 294.6 billion won.
The Financial Supervisory Service pointed to excessive competition to attract investors as a result of the inspection. Across the securities industry, firms are competitively running aggressive events to attract overseas investment clients, such as for U.S. stocks, and to expand market share. In particular, they are encouraging more overseas investment by offering cash payments proportional to transaction amounts, purchase support funds for new and dormant clients, and fee reductions.
They are also actively encouraging overseas investment sales by reflecting overseas stock market share and fee revenue in key performance indicators (KPI) for branches and headquarters. For example, many securities firms assign separate scores related to overseas stock performance in the KPIs of branches and sales departments, and some firms reflect overseas investment performance in the KPIs of control departments.
While margin lending for overseas stocks is currently not in operation, the Financial Supervisory Service noted that, across the securities industry, guidance to clients on risks that may arise with overseas investment is insufficient compared with domestic investment. Most firms disclose risks only when the first account is set up via terms and conditions, and only some firms provide ongoing notices to clients.
All securities firms ban the sale of overseas options by individual investors that carry the risk of losses beyond principal. A securities firm that recently faced an issue over excessive advertising decided during the inspection to postpone the launch of its U.S. stock options service to next year.
The Financial Supervisory Service will immediately switch to on-site examinations based on the results of the inspection. It will continue inspections of asset managers by expanding the pool of targeted companies. If unlawful or improper acts are found during examinations—such as misleading advertisements that entice investors, solicitations unsuitable for an investor's risk tolerance, or insufficient explanations of investment risks—it plans to respond strongly with the highest level of measures, including suspending overseas stock operations.
New cash-like events and advertisements related to overseas investment will be halted through the third quarter of next year. The Financial Supervisory Service will decide whether to resume them later, considering market conditions, the industry's self-correction efforts, and the progress of system improvements.
In addition, the FSS will push system improvements to impose a blanket ban in the first quarter of next year on transaction-amount-proportional events that could induce excessive trading. A revision of association rules is also necessary.
Securities firms must use home and mobile trading systems (HTS/MTS) to guide investors on risks that may arise in overseas investment, and they agreed to refrain, when drawing up next year's business plans, from excessively reflecting overseas investment-related events, advertisements, and KPIs.
An official at the Financial Supervisory Service said, "We will swiftly reflect and pursue improvement tasks through discussions with the association and the industry going forward."