FSC criticized for lax supervision of brokerages

Financial regulators were under criticism for their apparently negligent supervision of the brokerage industry as evidence of a group of securities firms’ interest rate-fixing was revealed by antitrust regulators.

Last Sunday, 20 local securities firms were reprimanded by the Fair Trade Commission with fines amounting to a combined 19.2 billion won ($17.5 million) for colluding to fix rates on some “small-denomination bonds.”

The antitrust regulator also filed a complaint with the prosecution against six brokerage firms including KDB Daewoo Securities, which is seen as being deeply involved in the rate-fixing scheme.

Market observers predict the brokerage industry will be subject to disciplinary measures once more for similar practices as several firms have been under another antiturst investigation for alleged collusion to fabricate rates on “certificates of deposit.”

When the FTC launched a full-fledged probe into allegations in July that major securities brokerage firms colluded to fix the rates on CDs, Financial Services Commission chairman Kim Seok-dong said, “I don’t think the companies conspired.”

FSC chairman Kim, as the chief financial regulator, had told the National Assembly that “there is not much the firms can gain by rigging market indices when interest rates have been liberalized and financial companies can set their own spreads.”

Further, several brokerage firms admitted irregular practices over the CD rates as the antitrust regulator made public its launch of an investigation four months ago.

The FTC investigation came as the CD rates remained relatively high when other market rates had dropped. The rate had remained unchanged at 3.54 percent for almost three months since March.

The CD rate is the benchmark rate for corporate and household loans. The interest rates of 56 percent for corporate loans and 23 percent for household loans are tied to the interest rate.

A leader in the consumer advocate sector said the FSC should be held accountable for its alleged supervision failure.

“It is lamentable that financial authorities had downplayed the allegations without being ashamed of their lax oversight of irregularities,” he said.

The Korea Finance Consumer Federation is considering calling on the rule-violators to return their undue profits. Should the companies refuse to pay, the consumer federation plans to pursue class action suits.

The FSC has yet to make any particular comment on the FTC’s sanctions on the securities firms.

Securities firms investigated by the FTC included Leading Investment & Securities, Dongbu Securities, Meritz Securities, Mirae Asset Securities, Woori Investment & Securities, Hana Daetoo Securities, Hanwha Securities, KB Investment & Securities, KTB Securities and LIG Investment & Securities.

Meanwhile, global investment bank J.P. Morgan had played down the possibility of Korean financial firms’ rigging of interest rates on CDs, saying they would have accrued limited benefits from the practice.

“We believe there is a limited possibility for banks and brokers to have manipulated the CD rate as it appears hard for them to get a sizable economic benefit from possible collusion over setting the CD rate,” a J.P. Morgan research analyst said last July.

By Kim Yon-se (kys@heraldcorp.com)