Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
The National Assembly passed the Capital Market Consolidation Act in July and now awaits the Blue House to pass a decree that implements it. The details of this decree can have a big influence on the final law, however û the Act itself is really just provides a framework which the president then fleshes out. The decree bill is already large and growing in detail, so observers say it may be delayed past its December deadline, but implementation must begin on 1 January 2009.
The Consolidation Act is meant to overhaul a fragmented financial system to bring it into international standards and allow the financial markets to catch up with KoreaÆs economic growth. This includes transitioning regulation based on type of institution to one based on function, expand permissible investment products and financial instruments, allow financial firms to expand into all areas of activity and to enhance investor protection.
The overhaul is widely welcomed but there are three areas of concern to the funds industry, says Yoon Tai-soon, chairman of Amak. First it allows securities companies to manage mutual funds. If done on a fair basis, this is not of concern to most fund houses; executives note that most securities companies already have an affiliated fund house, and the complexity and mindset of building a new business from scratch will limit securities firmsÆ competitiveness in this field.
But this assumes that sufficient Chinese walls are built in securities firmsÆ business, so that there are no conflicts of interest with their exiting businesses in brokerage and segregated accounts. Until 2000, brokerages had their own collective investment schemes, which were not run independently but used as appendages of the securities business. Such æinvestment trust companiesÆ became full of poorly managed, under-performing exposures that were blown up in the wake of the Asian financial crisis, which prompted the government to split funds and broking businesses. Yoon says the Consolidated Act calls for there to be no conflict of interest, but notes the devil is in the decreeÆs details.
The second issue Amak is working on, says Yoon, is how to consolidate itself with two other self-regulatory organisations (SROs): the Korea Securities Dealers Association (KSDA) and the Korea Futures Association (Kofa). With the same financial investment services available across the board, it makes sense to have a single regulatory body. But KSDA is much bigger, older, richer, and has its own governance system. Amak hopes to come to a solution that might see devolution within the super-SRO, to allow the funds industry to maintain its influence. Talks have yet to begin with the KSDA or Kofa, and itÆs not clear whether the debate will include the Ministry of Finance and Economy and the Financial Supervisory Service.
The third issue is to make sure the presidential decree facilitates the ability of local fund houses to outsource domestic asset management to other local firms. The growing use of niche asset classes such as private equity or real estate has created a need for some companies to use sub-advisors, but this is prohibited under current regulations. The Consolidation Act says this will be allowed but the details must be right for this opportunity to be realised.
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