The combination of the global financial crisis and the brand-new Financial Investment Services and Capital Markets Act has created two priorities for Korean regulators with regard to investment products: risk management and mis-selling.
Kim Dong-chul, director of the asset management servicing division of the Financial Supervisory Service (FSS), says he plans to take a number of measures to enhance investor protection. These will include for the first time "mystery shopping" -- that is, sending agents to pose as customers at banks and securities firms, looking to buy funds -- as well as identify examples of good risk management for the rest of the industry to study.
In particular, Kim says Samsung Investment Trust Management and Shinhan BNP Asset Management have risk management procedures and policies that follow good practice. Kim wants to create case studies out of these firm's processes.
The biggest concerns regarding asset management to reach the FSS in the wake of the new Capital Markets Act (which became law on February 4) are with regard to product suitability and the fund-sales process.
"There have been a lot of complaints about the time it now takes to sell a fund," Kim says, referring to new know-your-client rules that can make a sale take an hour or more, which is a radical departure for most Koreans. Fund managers and distributors support these initiatives in principle but moan about new rules being imposed at a time when it's very difficult to sell a product at all.
"We are looking at ways to improve this," Kim adds, suggesting ideas such as helping distributors improve their IT platform to speed up the process. But the FSS remains committed to know-your-client standards and suitability requirements, which are seen as necessary under a new regulatory regime that provides fund manufacturers more leeway in terms of product development and innovation.
Nonetheless, the conversation with Kim Dong-chul revealed widespread uncertainty over the new Capital Markets Act and how to identify a product's risk profile. Fund executives and distributors say the implementation of the new regime still leaves many unanswered questions, which will crimp their ability to do business.
Evidence of the gulf between regulatory and industry expectations was encapsulated in a question to Kim about how products are classified. The FSS has introduced a five-tiered classification system. A product classified as '1' is high risk, including overseas equity, while '5' is lowest risk, such as money-market funds.
Fund executives say they support this in theory but the manner of classifying products is less than optimal. For example, an active equity fund is considered equally risky as an indexed strategy. In another example, a local reporter has apparently asked several banks how they classify Mirae Asset's global emerging-market equity Insight Fund; answers varied from '1' to '3', according to the story.
Kim says that it is the fund managers that should determine a product's risk classification, however, not the distributor. "They [the fund manager] know the product best," he says. "We will examine how asset management companies do this and ensure their strategy is in line with the prospectus."
To ensure this point was not lost in translation, AsianInvestor asked if the FSS's risk classification of investment products was a guide open to interpretation, not a strict rule, to which Kim says yes.