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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHUL #0688/01 0621108
ZNR UUUUU ZZH
R 031108Z MAR 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC 6335
INFO RUCPDOC/USDOC WASHDC 2867
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RHEHAAA/WHITE HOUSE WASHDC
RUEHSS/OECD POSTS COLLECTIVE
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 0261
RUEHBJ/AMEMBASSY BEIJING 0179
RUEHRO/AMEMBASSY ROME 0782
RUEHFR/AMEMBASSY PARIS 1484
RUEHGB/AMEMBASSY BAGHDAD 0047
RUEHHK/AMCONSUL HONG KONG 2559
RUEHIN/AIT TAIPEI 1555

UNCLAS SECTION 01 OF 04 SEOUL 000688 
 
SIPDIS 
 
SIPDIS 
 
PASS USTR FOR CULTER, AUGEROT, KI AND CLAMAN 
STATE FOR EB/IFD, EB/BTA AND EAP/K 
TREASURY FOR IA/ISA/DOHNER, TRAN AND BUCKLEY 
TREASURY ALSO FOR IA/ITT/CHANG 
COMMERCE FOR 4431/MAC/OPB/EAP/MORGAN 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD PREL KS
SUBJECT: Korea's Finance Ministry Floats a Mini-"Big Bang" 
 
 
SUMMARY 
------- 
 
¶1.  Korea's Ministry of Finance and Economy (MOFE) has 
launched an impressive new raft of regulatory reform 
measures in the early months of 2006.  According to ministry 
plans, regulations governing financial services will be cut 
drastically, with barriers separating traditional business 
domains eliminated or significantly reduced.  Foreign 
financial service providers have welcomed the new measures 
as evidence of the Korean government's intention to try to 
make good on the promise inherent in the "financial hub" 
vision originally outlined by President Roh Moo-hyun when he 
took office three years ago.  End Summary. 
 
MOFE PROPOSES SIGNIFICANT FINANCIAL REGULATORY REFORMS 
--------------------------------------------- --------- 
 
¶2.  The Ministry of Finance and Economy formally announced a 
series of new financial regulatory reform measures on 
February 19, after having foreshadowed the action through a 
number of previous public statements starting in early 2006. 
Announcing the initiative, Korea's Deputy Prime Minister in 
charge of finance and the economy, Han Duck-soo, proclaimed 
that "The twin pillars of the Act are opening and 
competition, with the purpose of giving financial firms a 
freer hand in the development and marketing of products." 
 
¶3.  According to MOFE's plans, the current six major laws 
individually governing each sub-sector of the financial 
system will be merged into one, while breaking down barriers 
between business lines.  Meanwhile, the number of 
regulations applied to financial services will be reduced in 
both number and impact, with the number of rules to be cut 
from the current 300 regulations to only 190 relevant rules. 
The ministry explains that the new deregulation steps are a 
result of its "Zero-base Financial Regulatory Reform 
Review," which took place in 2005. 
 
¶4.  Financial shares rose sharply on the news of the 
ministry's reform plans, with listed securities companies 
seeing increases in share prices in the 10-12 percent range 
on February 20, the next trading day, even as the market 
overall grew just one percent that day. 
 
¶5.  The key piece of legislation to bring to life MOFE's 
dream will be a new "Capital Market Consolidation Act," 
which MOFE will submit to the National Assembly in the 
second half of 2006, aiming for entry into force in 2008. 
According to MOFE, the Consolidation Act will aim to 
fundamentally reformulate the legal framework that has 
governed Korea's capital markets for the last 43 years, ever 
since the enactment of the Securities and Exchange Act in 
¶1962.  MOFE promises that the legislation will revamp 
Korea's existing regulatory system by (to the extent 
possible) switching from positive-list to negative-list 
regulation of financial services.  In addition, the new 
rules should go a long way toward eliminating sector-by- 
sector division to allow more "universal" financial services 
business models. 
 
¶6.  For example, under the Consolidation Act, non-bank 
financial institutions will be empowered to manage and 
market more versatile products, freely deciding what sort of 
assets to include in each investment portfolio.  Investment 
banks will also be allowed to engage in a variety of 
financial services ranging from investment banking to wealth 
management, securities services and futures.  MOFE also 
pledges that, with its new rules, investors will enjoy 
improved investor protection, "on a par with that of the 
 
SEOUL 00000688  002 OF 004 
 
 
advanced economies," while being furnished with improved 
investment opportunities into new and diverse financial 
products.  Corporations raising funds should also be able to 
utilize a wider range of financial sourcing methods tuned to 
their specific needs. 
 
¶7.  MOFE notes that its legislation will be at least loosely 
modeled on Australia's Financial Services Reform Act of 
¶2001.  The legislation also draws inspiration from the 
United Kingdom's "big bang" reforms of the 1980's, which 
helped make London into the key financial services center of 
Europe. 
 
ANATOMY OF A MINI-"BIG BANG" 
---------------------------- 
 
¶8.  In May 2005, MOFE established 13 public-private task 
forces to study the benefits of a "zero-base" financial 
regulatory reform initiative, and to conduct a comprehensive 
review of Korea's regulatory situation.  Altogether, the 
task forces reviewed 40 financial laws and decrees, 
including 639 individual regulations.  Of that total, the 13 
task forces identified 101 laws, decrees and rules that 
could be improved or eliminated, including 85 that need 
extensive modification, 13 recommended for elimination and 3 
items marked for later review. 
The ministry also created its own "zero-base regulation 
reform task force" charged with pushing things forward, 
while keeping the public and industry informed. 
 
¶9.  Taking inspiration from the Prime Minister's Regulatory 
Reform Committee, the MOFE teams conducted a "zero-base" re- 
examination of the need to keep each regulation. 
Importantly, the teams were tasked to review Korea's 
financial regulations from the perspective of the parties to 
be regulated, rather than the perspective of those who 
regulate -- the more typical approach.  The groups' 
philosophical mandate stated that they should: 
 
-- Overhaul irrelevant, redundant or excessive regulations 
that restrain creative activity by the private sector; 
 
-- Streamline or eliminative ineffective regulations; 
 
-- Lower barriers to entry for financial firms; 
 
-- Improve equality among the various financial business 
sectors; and 
 
-- Enhance international integrity to stay in line with 
global standards. 
 
¶10.  Among the specific results of the "zero-base" review, 
the experts recommended the following major regulatory 
changes: 
 
-- Permit solicitation by insurance planners and investment 
consultants; 
 
-- Permit indirect investment funds to invest in credit 
derivatives for hedging purposes; 
 
-- Permit banks to buy and sell commodity derivatives and 
financial derivatives; 
 
-- Ease regulations on foreign currency asset management 
ratios for insurance companies; 
 
-- Ease regulations on loans to the same borrower by mutual 
savings banks; 
 
SEOUL 00000688  003 OF 004 
 
 
 
-- Lower regulatory thresholds for establishing financial 
holding companies; 
 
-- Lower entry barriers for the credit rating business; 
 
-- Expand the criteria for issuers (originators) of asset- 
backed securities; 
 
-- Ease approval requirements for controlling shareholders 
of insurers; 
 
-- Ease restrictions on opening branches for mutual savings 
banks; and 
 
-- Abolish the securities issuer registration system. 
 
¶12.  Meanwhile, the Consolidation Act will merge Korea's 
Securities and Exchange Act, Futures Trading Act, and other 
capital market-related laws under a single law.  Some of the 
major elements of this proposal include: 
 
-- Financial Services Deregulation:  Current restrictions 
that strictly separate securities, futures, asset 
management, trust services and other financial services 
businesses (excluding banking) are to be removed to allow 
financial services companies to offer multiple financial 
services; 
 
-- Broader Scope for Financial Investment and Products: 
Financial investment and other related products are to be 
broadened from the current "positive list" system, which 
enumerates what is allowed, to a "negative list" system that 
enumerates what is not allowed, to encourage greater 
investment and better financial products; and 
 
-- Deregulation of Indirect Investment:  Current 
restrictions that recognize only trust investments (in the 
form of beneficiary certificates), corporate-type investment 
companies (mutual funds), and private equity funds as 
indirect investment vehicles are to be removed so that other 
entities recognized under the Commercial Code can be 
included as indirect investment vehicles. 
 
COMMENT: PROSPECTS FOR SUCCESS 
------------------------------ 
 
¶13.  Some local critics have noted that barriers to business 
linkages between the banking and securities sectors were 
eliminated over 20 years ago in several leading Western 
markets -- making the Korean rules changes not so much 
courageous as overdue.  Even so, foreign financial servie 
providers have welcomed the new measures as evidence of the 
Korean government's intention to try to make good on the 
promise inherent in the "financial hub" vision originally 
outlined by President Roh Moo-hyun when he took office three 
years ago. 
 
¶14.  Overdue or not, MOFE's reform plans are timely. 
Domestic financial institutions need to re-position 
themselves to take better advantage of demographic changes 
and the excess liquidity currently sloshing around Korean 
financial markets.  The Korean government has reason to hope 
that the newly-announced reforms will lead to the genesis of 
homegrown investment banks and asset management firms that 
will be fully-equipped for global competitiveness. 
 
¶15.  The Consolidation Act and MOFE's other deregulation 
initiatives are certain to be closely examined in the 
National Assembly, precisely because the legislation could 
 
SEOUL 00000688  004 OF 004 
 
 
have a major impact on various Korean financial 
institutions, especially banks and insurance companies. 
Weaker Korean banks and some insurance firms will likely 
seek to water down or slow down MOFE's proposed changes, 
both before and after it submits legislation to the National 
Assembly.  It is also possible that other ministries will 
seek to retard the initiatives, seeing them as a MOFE power 
grab.  However, given the Roh Administration's apparently 
strong commitment to the initiative, and the widespread 
sense in Korea that financial sector reform is still a work 
in progress, which needs to be pushed farther forward, the 
Embassy remains sanguine that at least the lion's share of 
MOFE's dream will see the light of day. 
 
¶16.  A final observation: The new round of financial reforms 
is also well-timed for U.S.-Korea bilateral economic 
relations.  Our bilateral discussions on financial services 
reform in the U.S.-Korea Free Trade Agreement talks -- if 
handled in such a way as to complement MOFE's plans -- could 
provide a useful adjunct to MOFE's own campaign for reform. 
Still, we should be careful to make sure that the two 
efforts proceed in parallel, but not directly-linked tracks, 
so as not to allow nationalism to become a counter-argument 
to MOFE's self-initiated reform measures. 
 
VERSHBOW