Korea Capital Market Institute

As the sales of complex and high-risk financial products, such as Hong Kong H-index ELS and interest rate-linked DLF, have increased, the amount of damage to financial consumers due to mis-selling has also risen. Despite substantial financial losses suffered by consumers due to mis-selling by financial companies, recovering damages often involves lengthy processes and high legal fees. In response, major countries like the U.S., U.K., and Japan have introduced various alternative dispute resolution systems to reduce the legal costs and time associated with civil litigation and to support quick compensation. In the U.S., organizations such as the CFPB, FINRA, and AAA provide various forms of financial dispute resolution, including settlement, mediation, conciliation, and arbitration. In the United Kingdom, the Financial Ombudsman Service (FOS), an independent non-profit organization, is responsible for resolving financial disputes. The FOS’s conciliation decisions are unilaterally binding, meaning that once a financial consumer accepts a decision, the financial firm must comply. Additionally, the UK’s Financial Services Compensation Scheme (FSCS) has established a system allowing financial consumers to receive compensation from a pre-established fund if they are unable to recover their investments due to mis-selling or poor advice on funds, structured products, etc. In Japan, each financial industry operates a designated dispute resolution organization. For the financial investment industry, FINMAC handles financial complaints and disputes. FINMAC is independent of the Financial Services Agency and mediates disputes between financial consumers and financial companies related to investment products, crypto assets, STOs, and more. FINMAC’s conciliation decisions are conditionally binding, meaning that if a financial consumer accepts a decision, the financial company must comply. In Korea, financial dispute resolution is managed by the Financial Supervisory Service Dispute Resolution Committee, the Korea Exchange Market Monitoring Committee, the Financial Investment Association Dispute Resolution Committee, and the Consumer Dispute Committee of the Korea Consumer Affairs and Consumer Services Commission. Among these, the Financial Supervisory Service Dispute Resolution Committee plays a significant role in cases involving the incomplete sale of financial investment products. Historically, general financial consumers in Korea have experienced lower compensation rates compared to other major countries, longer compensation times, and lower acceptance of settlement decisions by financial companies. Korea’s financial dispute resolution system is somewhat limited in diversity, operating primarily through dispute mediation. There are many opinions that it needs to be more independent and specialized. Specifically, the Financial Supervisory Service’s Dispute Mediation Committee is inadequately staffed, leading to ineffective dispute resolution. Additionally, the mediation decisions of the FSS are not unilaterally binding, and financial companies often do not accept these decisions. Furthermore, there is no collective dispute settlement system for cases of mis-selling, which limits the ability of many victims to receive appropriate relief. Therefore, it is necessary to improve the Korean financial dispute resolution system to provide quick compensation to financial consumers and reduce legal costs. First, the independence and expertise of the Financial Supervisory Service’s Dispute Mediation Committee should be enhanced, and its staffing and budget should be expanded to strengthen its practical functions. Second, to improve the effectiveness of the financial dispute resolution system, introducing a Japanese-style limited one-sided binding mechanism should be considered. For one-sided binding to be effective, it is essential to enhance the independence and professionalism of dispute resolution organizations and ensure access to justice. Third, the introduction of a consumer protection relief fund system should be considered in the medium to long term to provide direct relief to ordinary financial consumers in financial disputes. Fourth, the introduction of a collective dispute mediation system should be considered to strengthen the relief available to general financial consumers, including the elderly and financially vulnerable.

This paper introduces the perspective of foreign investors and intermediaries regarding the market accessibility of Korea’s capital markets. Korea’s capital markets, by quantitative measures, belongs alongside developed markets. However, in major market indices, mainly the MSCI stock market index and FTSE Russell bond market index, Korea is classified as an emerging market. The discrepancy between the quantitative and qualitative aspects of Korea’s capital markets comes from the market accessibility assessment, used by MSCI and FTSE Russell. In both the MSCI and FTSE Russell market accessibility assessments, foreign financial institutions play an important role in providing feedback that is used as input for market classification. To better understand why Korea’s market accessibility is regarded as being below developed country standards, interviews were conducted with major financial firms that invest and intermediate investment in Korea. The group includes global asset managers, banks, custodians, boutique investment banks, hedge funds, market makers, system traders along with ASIFMA and GFMA. The results of the interview reveals that various issues related to market accessibility are interconnected. In particular, areas of market accessibility that Korea falls behind in are not just rules and regulation, but process and practice. Interview participants emphasize that in order to improve Korea’s market accessibility, rules and regulations need to be applied more transparently and consistently. In addition, the most effective measure suggested to enhance Korea’s market accessibility is to improve communication between Korea’s financial regulators and industry with the foreign investor community.

This report analyzes the long-run causal relationship between the stock market and economic growth in OECD countries, including South Korea. Using stock market size, depth, liquidity indicators, and a vector error correction model, this report estimates the long-run causality of each indicator on GDP. According to the empirical analysis, one or more stock market indicators show a positive long-run causality on GDP in Korea, Australia, Belgium, Spain, and Mexico. In particular, the real market capitalization and turnover exhibit a positive long-run causality in Korea, implying that the increase in the stock market size and liquidity has a positive impact on the real sector. The positive long-run causality of stock market indicators on GDP tends to be observed mainly in countries with a significant increase in financial openness. What is notable in Korea's case is its significant increase in the number of listed companies per capita compared to other countries studied. Based on the findings, an additional analysis is conducted, assuming that Korea's stock market affects capital accumulation through listings. The results show that the path has a significant impact. In summary, the analyses in this report find that the real market capitalization and turnover have a positive long-run causality with the number of listed companies, while the number of listed companies has a positive long-run causality with capital stock. These results suggest that the increase in the stock market size and liquidity could facilitate more firms to go public, subsequently promoting capital formation and thereby having a positive impact on the real economy. The empirical results in this paper imply the need for continuous efforts to develop the stock market, which could play a role in driving the growth of the real economy. Korea's stock market faces several challenges that require structural improvements, such as enhancing shareholder value, improving corporate governance, and establishing a long-run investment culture, among others. It is necessary to address the structural issues in order for the stock market to serve as a solid growth driver for the real economy. This will require not only the efforts of firms and investors, but also institutional improvements and policy support to ensure consistent implementation of these efforts.