November 28, 2024

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The Financial Services Commission in Seoul (Yonhap)

South Korean financial authorities have announced a set of new rules, including abolishing the decades-old investor registration system, in a move to create a welcoming environment for foreign investors.

According to the Financial Services Commission, foreign investors hold around 30.7 percent of the local stock market as of the end of June 2022.

The new revisions are also a part of the country's efforts to get its stock market included in the top grade of global market indices. The government has been seeking to get the Korean equity market upgraded to “developed” status from the current “emerging” status by New York-based index provider Morgan Stanley Capital International.

If realized, the local stock market is expected to attract some $55 billion worth of net foreign capital inflow, according to Goldman Sachs.

Below are the key takeaways from planned policy changes this year.

Investor registration scrapped

Currently, foreigners who want to invest in listed stocks and bonds here must be registered in advance with the Financial Supervisory Service.

This law was implemented back in 1992 to better monitor foreign investments. When foreigners register, their trading records can be tracked through a foreign investment management system.

However, this procedure has been considered excessive by many foreign investors, as it does not exist in other countries with developed markets like the US, Japan and Germany, according to the FSC.

By the end of the second quarter, Korean financial authorities will revise laws so that foreign investors do not have to go through this extra registration process. A related system will be developed by the end of the third quarter.

Once the change takes place, foreign investors will be able to go through a simple verification process with their passport number or legal entity identifier (provided to corporations) when making accounts at securities firms in Korea.

Those who have already registered with the FSS under the current law can continue using their registered numbers.

Omnibus account revived

Back in 2017, the Korean financial regulator introduced an omnibus account system for foreign traders to help boost convenience in trading stocks.

With this system, a global asset management firm or brokerage house can open a single account to receive trading orders from their clients and place them with a Korean securities company. These orders also can be settled through a single "omnibus account."

This new system was expected to reduce traders' inconvenience and also cut transaction costs.

However, this turned out to be useless, as the system was not used at all since it was created, according to the FSC.

The financial regulators saw that the problem lay within its mandate for local securities firms to report investment information each time they made settlements.

Under the changed system, local securities only have to provide foreigners' investment information when the financial authorities ask for it.

This change will be completed by the end of the third quarter.

Nevertheless, the limitation will still remain when foreigners invest via omnibus account to some of the companies in key industries such as airlines, telecommunications, broadcasting and newspapers.

English disclosures mandated

Beginning in 2024, the financial watchdog will mandate companies to disclose investment-related information in English.

Related regulations of the Korea Exchange will be revised by the first quarter of this year.

The mandate policy will first apply to heavyweight Kospi-listed firms with assets worth more than 10 trillion won ($7.7 billion) in 2024. Among Korea Exchange disclosures, important management information including settlements and trading suspension has to be provided in English within three days after disclosing in Korean.

This regulation will later expand to Kospi-listed companies that have more than 2 trillion won in assets in 2026.

Penalties for those who do not comply with the new policy have yet to be decided.

It is still important for foreigners to double-check Korean disclosures in advance before making an investment decision. This is because if Korean and English disclosures are inconsistent due to translation mistakes, the Korean version will be considered the accurate one.

By Song Seung-hyun (ssh@heraldcorp.com)