Vice Chairman Kim So-young of the Financial Services Commission held a media briefing on the progress and achievements of the government’s capital market reform agendas on August 17. The following is a summary of Vice Chairman Kim’s remarks.

I. Key Achievements

This administration has been actively pursuing capital market reforms as a key part of the government’s policy priority. In particular, the government has taken bold steps to resolve the problem of the so-called “Korea discount” by enhancing investor protections, removing outdated regulations and overhauling rules to foster innovation in the market. Despite the presence of difficult economic and financial conditions, there have been some favorable outcomes achieved thank to active cooperation between relevant institutions and industries.

Restoring Investor Trust

First, the government has prioritized in implementing a set of measures aimed at restoring investors’ trust in the capital market. In this regard, the government’s policy focused on (a) strengthening the rights and interests of general shareholders, (b) bolstering response against fraudulent and unfair trading activities, and (c) ensuring order and fairness in the market. With regard to strengthening protections for general shareholders, we have put in place three layers of protection mechanisms at the end of last year to ensure that the rights and interests of general shareholders are thoroughly guaranteed in an IPO of a split-off subsidiary. Since the introduction of the measures, we have seen changes in corporate practices as more companies are drawing up shareholder protection plans on their own and communicating with shareholders to seek their consent. To protect general shareholders from unforeseen damages caused by insider transactions involving large shareholders or executive officers, we introduced a rule requiring corporate insiders to disclose their share trading plans before the expected trading date. To ensure that general shareholders can also benefit from control premiums of the company in mergers and acquisitions (M&As), we introduced the mandatory bid rule requiring the largest shareholder to make a public tender offer to purchase shares from the remaining shareholders.

With regard to the measures to bolster response to fraudulent and unfair trading activities in capital markets, a revision bill of the Financial Investment Services and Capital Markets Act (FSCMA) introducing a penalty surcharge system and a method for calculating unfairly gained profits was passed by the National Assembly in June. With specific details prepared in the Enforcement Decree, we plan to begin implementing this rule starting from January next year. Along this line, we have diversified the types of sanctions imposable on those breaking rules and engaging in unfair trading activities in capital markets, for instance, through a ban on capital market transactions, etc. In addition, we have introduced stricter rules on short selling violations than before as we have imposed penalty surcharges on the entities that engaged in illegal short sale activities for the first time and revealed their company names.

For ensuring order and fairness in the market, we have carried out the following reform measures. First, we have strengthened short selling rules to prevent overheating and resolve retail investors’ mistrust. Second, we have introduced rules to prevent the problem of fictitious oversubscription in the IPO market by strengthening rules concerning the book building process and improving rules to prevent excessive price swings after IPO. Third, regarding the contract for difference (CFDs) market, which has shown vulnerabilities linked to recent unfair trading activities, we have immediately taken actions to enhance protections for individual professional investors and prevent regulatory arbitrage. Lastly, for factional investment, which lacked a regulatory framework and had loopholes in investor protections, we introduced a set of guidelines and rules to ensure that the fractional investment market can develop within a legal framework.

Strengthening Capital Market’s Function

Capital market is where our economy and businesses can get investments needed for growth and share the outcome of growth with investors while allowing them to reinvest their profits back in the market, thus providing a core function of a virtuous cycle of economic growth. The government has been working on various capital market reform measures to ensure that our capital market can more effectively play this function. In the first half of this year, we focused on making our capital market rules more consistent with global standards. First, we abolished the foreign investor registration requirement after about 30 years since it was first introduced. From the end of this year, foreign investors will be able to open up investment accounts and begin investing in locally listed stocks without having to register with the authority. This will significantly improve foreign investors’ access to Korean stock markets. Second, the first stage English disclosure requirement will begin from next year with large listed companies with KRW10 trillion or more in assets. With this rule in place, most of the issues that have been pointed out thus far as being inconsistent with the rules in advanced markets will be resolved. Also, the dividend distribution process has been made more reasonable to ensure that investors can make investments in stocks after knowing how much they will earn in dividends. This will promote longer term oriented dividend investing practices among investors and encourage companies to raise their dividend ratios.

The government has also introduced various measures to boost innovation and competition in the financial investment sector to better cope with the emergence of new technologies and changing demand in the market. First, we prepared a regulatory framework to permit the issuance and distribution of security tokens with investor protection mechanisms already available in the capital market system. This is the first case of legally recognizing the distributed ledger technology as a means of registering an electronic form of security. In a world where regulatory standards concerning STOs (security token offerings) are still at a formative stage, this will provide a significant edge to Korea. Second, we have also granted a preliminary license to allow operation of an alternative trading system (ATS) to foster competition and bring down monopoly of the securities exchange system. Third, we have prepared a plan to launch business development companies (BDCs), which will serve as new vehicles in promoting venture investment.

Lastly, in a move to improve the accounting rules and the external audit requirement, we have introduced measures to reduce accounting burdens on small and medium-sized enterprises while ensuring sufficient provision of useful information to investors. Specific accounting guidelines on virtual assets have also been prepared to seek more transparency.

Ensuring Financial Stability

Last year, market anxiety caused by the liquidity risk of real estate project financing (PF) of securities companies presented some difficulties. However, the government’s active and timely market stabilization measures, such as the RP (repurchase agreement) and CP (commercial paper) purchase program, the KRW1.8 trillion real estate ABCP (asset backed commercial paper) purchase program and the measure to cool demand for refinancing of ABCPs, were put in place to ensure market recovery in a short period of time.

Based on our experience of dealing with financial instability, in the first half of this year, we have made improvements to the risk management system in a preemptive manner. In this regard, we have introduced a way to incentivize securities firms to convert their short-term real estate PF-ABCPs into longer-term loans to resolve the problem of maturity mismatch, while helping securities firms to quickly write off non-performing loans. Considering potential risk factors at home and abroad, we have also extended the period of operating market stabilization measures. In order to ensure that there is no excessive money moves between retirement pension funds and financial institutions toward the end of the year, we have taken steps to encourage contribution payments to be made in installments and spreading out maturities. In this regard, a set of reform measures aimed at preventing excessive interest rate competition between financial institutions will also go into effect soon.

II. Plan for H2 2023

The government will continue to maintain its policy priority on restoring investors’ trust, strengthening capital market’s function and ensuring financial stability in the second half of 2023, while seamlessly implementing the measures already introduced. As there are many legislative bills pending at the National Assembly, the government will work closely with the legislative branch and support the legislative review process. First, we will continue to work on policy agendas intended to protect general shareholders and strictly punish unfair trading activities to restore investors’ trust. First, we will prepare a plan to improve rules on treasury stocks within this year, seeking to properly balance the need for shareholder protection and the demand for businesses’ ability to fend off their management control. Second, we will seek to introduce regulatory improvements on convertible bonds to ensure that CBs continue to serve as a means of raising funds for SMEs, while preventing their use in unfair trading activities. Third, the FSC plans to announce measures to overhaul the response system for unfair trading activities along with the relevant institutions in the third quarter to strengthen the government’s response capabilities in handling securities crimes. Lastly, we will introduce ways to better manage excessive concentration of funds in certain stock items while providing accurate information about particular stock items to investors.

Next, since our capital market has grown to a level where it is expected to play more roles, we will seek to reform regulations accordingly. First, we will take steps to finish up the remaining measures in the plan to improve the special listing procedures for high-tech companies within the second half of this year to enable deep tech or other high-tech companies to go public to raise funds and grow quickly. Along this line, we will also announce measures to legally embrace the unlisted stock trading platform, which is currently in operation through the regulatory sandbox program. Second, we will introduce reform measures on trust businesses to help to strengthen their function of providing individually tailored professional and comprehensive asset management service, while laying foundations to allow their use as alternative investment products such as fractional investment. Third, we will continue to work on remaining policy agendas intended to support corporate M&A activities to boost the efficiency and dynamism of our economy and businesses. Lastly, we will draw up a roadmap for ESG disclosures, taking into account conditions and factors suitable for our economy and businesses, to open up the era of ESG finance, as ESG constitutes an important global agenda for both governments and businesses and for regulators and markets.

Finally, we will continue to make efforts to ensure stability in the financial system. We will introduce measures to improve how securities firms’ net capital ratios are calculated concerning their real estate PF and closely check the overseas alternative investment risks of securities firms and investment funds. To ensure that financial institutions’ retirement pension contributions are paid in installments, we will seek close cooperation with the industry while closely monitoring the year-end money moves associated with pensions.

The government will continue to actively push forward with capital market reform agendas with the goal of resolving long overdue problems and bringing about meaningful changes in our capital market. Working closely with the relevant organizations and industries, we will make sure that the measures already announced are seamlessly implemented in the market, while continuously searching for other areas that need to be reformed.

* Please refer to the attached file for details.