South Korea's Financial Services Commission announced plans to implement interest payments on IPO subscription deposits during the second half of the year, according to a May 15 report to the presidential office. The move addresses what the FSC termed an 'unreasonable practice' where investors receive no interest on subscription deposits held by securities firms, despite those firms earning revenue from the funds. The regulatory gap persisted for 13 years following a 2013 Board of Audit and Inspection finding that flagged the lack of interest payments as problematic, with no subsequent legal amendments enacted to mandate such payments.
FSC Cites Legal Ambiguity as Basis for Non-Payment Practice
The FSC attributed the non-payment practice to unclear legal provisions in the Capital Markets Act. Current law requires securities firms to deposit investor funds with Korea Securities Finance but does not explicitly mandate interest payments on IPO subscription deposits. Interest payment rules exist only in lower-level administrative regulations (Financial Investment Business Regulations), which delegate specifics to the Korea Financial Investment Association. Industry participants historically interpreted 'entrusted customer deposits' as excluding IPO subscription deposits, treating them as temporary 'down payment' funds distinct from regular investor deposits. An FSC official stated that 'the subscription deposit portion is a legal amendment matter, so Financial Investment Association regulation amendments were not implemented' following the 2013 audit.
Board of Audit Flagged Issue in 2013 with No Regulatory Follow-Up
The Board of Audit and Inspection in 2013 notified the FSC chairman that non-payment of usage fees on subscription deposits was 'unreasonable' and instructed the development of a payment plan including potential Korea Financial Investment Association regulation amendments. No government-led legislative proposals emerged between 2013 and the present. Lawmaker Lee Jung-moon of the Democratic Party introduced a Capital Markets Act amendment in June 2022 to add subscription deposits to the investor deposit definition, but the bill expired when the 21st National Assembly term ended. Lee introduced an identical bill in June 2024, which remains pending in committee after two years.
Subscription Deposits Generated 105 Billion Won in Firm Revenue from 2021-2023
According to a National Assembly Policy Committee legislative review report on Lee's bill, total investor deposits in 2023 reached 53.8 trillion won. Korea Securities Finance paid 1.9 trillion won in interest and operating income to securities firms that year, with only 472.4 billion won—less than one-quarter—returned to investors as usage fees. From 2021 to 2023, investors provided 1,650.7 trillion won in subscription deposits across 634 IPO and capital increase transactions. Those deposits generated approximately 105 billion won in deposit revenue for Korea Securities Finance and securities firms. Investors received zero won in usage fees on those subscription deposits.
FSC Commits to Second-Half Implementation Plan
Ko Young-ho, director of the FSC's Capital Markets Division, stated: 'We pay interest under the usage fee name for deposits, and we are reviewing a plan to return profits to individuals who provided funds, considering operating profits and costs in the subscription process on the public offering side. There is a pending legislative bill, and we need to consider whether to change the financial investment company business regulations or pursue legal amendment.' A Korea Financial Investment Association official said: 'It appears that specifying subscription deposits in the definition of investor deposits should take priority. Once the FSC decides whether to amend the law or change regulations without legal amendment, the Korea Financial Investment Association will take measures accordingly.'
FAQ
Q: What did South Korea's FSC announce on May 15 regarding IPO subscription deposits?
A: The FSC announced plans to implement interest payment mechanisms for IPO subscription deposits during the second half of the year, addressing a practice where securities firms earned revenue from these deposits without compensating investors.
Q: How much revenue did securities firms generate from subscription deposits between 2021 and 2023?
A: Securities firms and Korea Securities Finance generated approximately 105 billion won in deposit revenue from 1,650.7 trillion won in IPO subscription deposits across 634 transactions from 2021 to 2023, with zero interest paid to investors.
