Still Neglected Pseudo-Investment Advisory Businesses... When Will Institutional Improvements Come?

Institutional Improvements Remain Minimal Since 2016 Cheongdam-dong Stock Millionaire Incident
Calls for Stronger Regulation or Transition to Registration System Emerge

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[Asia Economy Reporter Gong Byung-sun] In 2016, Lee Hee-jin, a stock millionaire from Cheongdam-dong, was arrested on charges of financial fraud. Having gained recognition through appearances on various economic broadcasts and entertainment shows, he exploited his fame to attempt market manipulation, resulting in nearly 100 billion KRW in damages. Financial authorities have supplemented regulations related to quasi-investment advisory businesses by introducing disqualification criteria for reporting to prevent a second Lee Hee-jin.

So, does the current quasi-investment advisory business system protect financial consumers? Unfortunately, the number of victims continues to surge. According to the Consumer Counseling Center, consultations related to quasi-investment advisory increased from 1,855 cases in 2017 to 16,491 cases last year, nearly a tenfold rise in three years. The monthly trend also shows a clear increase. The number of monthly damage relief cases related to quasi-investment advisory rose from 190 in January last year to 427 in November, with 363 cases reported in December as well.

As a result, criticisms persist that the quasi-investment advisory business system still fails to protect financial consumers.

Quasi-investment advisory business can be started too easily... No verification of expertise, soundness, or reliability

The quasi-investment advisory business can be started much more easily than the existing investment advisory business. While investment advisory businesses require registration, quasi-investment advisory businesses operate under a reporting system. Anyone can become a quasi-investment advisor by simply submitting a report in a prescribed format. The report and attached documents must be sent by mail. The attachments include business registration certificates, office and facility contracts, business plans by information provision methods, membership contracts including fee structures, copies of training completion certificates, and copies of resident registration cards?simple forms of documentation. This leads consumers to mistakenly believe that the Financial Services Commission or the Financial Supervisory Service guarantees the expertise, soundness, and reliability of quasi-investment advisory firms.

Moreover, the reporting requirements are almost nonexistent. Since it is a reporting system, approval is easier than for investment advisory businesses, and simple career or qualification checks are not conducted.

First, investment advisory businesses must have professional personnel. To start an investment advisory business, at least one full-time employee qualified as an investment solicitation advisor must be employed. For investment discretionary businesses, at least two investment management personnel must be employed, and their career certificates and qualification documents must be submitted.

In contrast, there is no process to verify expertise anywhere in the quasi-investment advisory business. The only document that can somewhat confirm expertise is a copy of the training completion certificate. However, due to COVID-19, quasi-investment advisory training is currently conducted online for eight hours, with most content focusing on illegality?that is, what actions violate the law.

Although capital and investment amounts must be stated, there are no standards regarding their scale. According to the Capital Markets Act, investment advisory businesses must meet a statutory minimum net capital of 100 million KRW to register. However, quasi-investment advisory businesses have no capital-related criteria. They only need to state capital and investment amounts in the report. Since no financial conditions are required to enter the capital market, it is impossible to verify whether the firm is sound. There is no mechanism to provide consumers with trust.

Consequently, quasi-investment advisory businesses are proliferating based on the reporting system and nearly nonexistent standards. According to disclosures by the Financial Supervisory Service, the number of newly established quasi-investment advisory firms increased to 487 in 2019 and 554 in 2020. In January and February this year, a total of 105 more firms were established, so arithmetically, about 630 new firms are expected this year. Of course, since it is a reporting system, it is unknown whether these rapidly increasing firms are fulfilling their roles.

Ambiguous or nonexistent business standards... "Distorting the meaning of advice under Article 101 of the Capital Markets Act"

Furthermore, the standards regarding the operation of quasi-investment advisory businesses are ambiguous or absent. According to Article 101 of the Capital Markets Act, quasi-investment advisory businesses must target an ‘unspecified large number of people’ and provide ‘advice’ on investment decisions or the value of financial investment products through publications, emails, etc. Investment advisory businesses are clearly distinguished by dealing with specific clients and allowing one-on-one contracts.

However, some quasi-investment advisory businesses have been suspected of promoting one-on-one consultations. Recently, as quasi-investment advisory businesses have expanded into popular YouTube channels, the damage has increased. These businesses openly display phone numbers in YouTube videos and advertise that sending a text message will provide specific stock recommendations. The videos claim stocks will surge by 900% or 1000%, arousing curiosity.

The Financial Consumers Federation pointed out that such business practices of quasi-investment advisory businesses are illegal. First, although they must target an unspecified large number of people, they provide information only to those who send text messages, effectively dealing with specific individuals like investment advisory businesses. If quasi-investment advisory businesses provide information to an unspecified large number of people, they should disclose the stocks in the videos rather than sending separate texts.

Additionally, it was argued that quasi-investment advisory businesses distort the meaning of ‘advice’ under Article 101 of the Capital Markets Act. Kang Hyung-gu, head of the Financial Consumers Federation, said, “The original intent of advice under Article 101 of the Capital Markets Act is to convey one’s investment secrets or philosophy, but currently, quasi-investment advisors only provide stock tips,” adding, “There is little difference from investment advisory businesses.”

Neglected quasi-investment advisory businesses "Strong regulation or transition to registration system needed"

Nevertheless, regulating them is impossible due to the lack of relevant regulations. Even if quasi-investment advisory firms commit illegal acts, they are currently left unchecked. Kang said, “It is necessary to specifically stipulate the permissible promotional methods and the meaning of advice for quasi-investment advisory businesses,” pointing out, “Under the name of freedom of business and freedom of expression, victims are being produced in blind spots.”

So why are quasi-investment advisory businesses neglected? They occupy a gray area under the Capital Markets Act. According to Article 7, Paragraph 3 of the Capital Markets Act, acts of issuing or transmitting and advising to an unspecified large number of people are not considered investment advisory businesses. However, Article 101 of the Capital Markets Act addresses quasi-investment advisory businesses. Although quasi-investment advisory businesses provide investment advice, legally they are not investment advisory businesses. Therefore, there is no need to regulate them under the Capital Markets Act.

Because of this, victims of quasi-investment advisory businesses must report damages to the Korea Consumer Agency, not the Financial Supervisory Service. Kang said, “Damages caused by quasi-investment advisory businesses are not damages under the Capital Markets Act, so victims must report to the Korea Consumer Agency for relief,” but he pointed out, “However, the Korea Consumer Agency’s dispute mediation is not binding, so even if quasi-investment advisory businesses do not accept it, sanctions cannot be imposed.”

Thus, there are calls for urgent institutional improvements. Regulations related to quasi-investment advisory businesses should be strengthened or the system should be converted to a registration system to bring them under regulatory oversight. Kang said, “Since quasi-investment advisory businesses often operate non-face-to-face via phone or internet, consumers cannot see all information directly, so stronger regulations are necessary,” adding, “If possible, they should be converted to a registration system and monitored within the regulatory framework like investment advisory businesses.” He also added, “Regulation does not kill the capital market but rather makes it cleaner and can be an opportunity for development.”

This content was produced with the assistance of AI translation services.