Korea’s financial industry is to face limited impact from the Free Trade Agreement with the European Union as there are few barriers in market access. On the other hand, the insurance industry is expected to benefit from the overall increase of trade.
The Korea-EU FTA, which took effect July 1, is pushing banks, insurance companies, asset managers and other financial institutions in both economies to share more information.
The deregulation is expected to help local banks expanding their operations to Eastern Europe, while easing remaining operational burdens for foreign owned financial institutions.
“The deregulations for the finance industry are meaningful in the long term, in the sense that they support local banks with plans to advance into Eastern Europe,” the Finance Ministry said in a report analyzing the impact of the trade pact.
“But the opening of barriers for the industry needs to be more specific in the future to resolve difficulties they may face while operating in Europe.”
The landscape of Korea’s financial district of Yeouido in Seoul. (The Korea Herald)
The gist of financial deregulations in the Korea-EU FTA includes allowing financial institutions to offer services to both European and Korean customers without operating where the customer is based. The EU has asked to further expand the scope of services European institutions can provide, but the negotiations were finalized at the same level as the Korea-U.S. FTA.
While the pact is the sixth such agreement Korea has implemented, the EU is the largest partner to implement such a deal with Korea. The region is Korea’s second-largest export destination and European goods account for the fourth-largest proportion of Korea’s imports. The exports to EU reached $53.5 billion last year, according to the Korea Customs Service.
The Samsung Economic Research Institute says the pact will push up Korea’s gross domestic product by 1.02 percent, while that with the EU will only increase the figure by 0.56 percent.
While the banking sector isn’t facing short-term benefits from the trade pact, Seoul sees it as a chance to upgrade the industry in the long run as they become more exposed to competition from top European financial institutions.
“The Korea-EU FTA on the financial industry part didn’t progress further from existing rules already open for foreign capital and customers. So it managed to minimize the downsides of further deregulation, but they need to be updated as financial institutions of both economies penetrate into each other’s market,” the report said.
Alvar Barra, director of Finance Services Committee at the European Union Chamber of Commerce in Korea, said the most important issue is with data sharing.
With the opening up of financial markets, information about investors and their transaction details needs to be protected, analysts said. The two regulatory bodies here ― The Financial Supervisory Services and the Financial Services Commission ― have two years to review and adopt measures on protection of such private information for a market where more offshore data processing. As for offshore data processing, current policies do not allow financial institutions to outsource their IT system.
“The FTA text does not have clear definition on the scope of information sharing allowed. Currently there are many different laws being applied to treat confidential information at financial institutions and this needs to be sorted out under deregulation of policies,” Barra told The Korea Herald.
Insurers are likely to benefit the most among financial institutions under the current pact. The pact will open up new trade opportunities in goods and services across marine transportation, airline and car industries, which will increase insurances on cargo.
According to the EUCCK, the new trade opportunities worth $45.6 billion for the EU and Korea, and remove 2.7 billion euros ($3.93 billion) in tariffs placed on goods traded between the two.
In the case of the Korea-Chile FTA, which took effect in 2004, annual trade increased 25.9 percent on average with 19.4 percent of insurance payment expansion each year, the Korea Insurance Development Institute said.
“FTA increases bilateral trade volume and this is followed by higher demand for insurance products. The start of the Korea-EU FTA should be used to grow local insurers,” an official at the KIDI said.
Demand for expertise in legal expenses insurance will also grow with more cases of international trade disputes.
“The legal expenses insurances market is a new one in Korea. But it is expected to expand fast with international litigations which usually costs a lot and thus need to be insured,” the KIDI official said.
The Korean government nurturing financial experts would be the key to compete with the inflow of world class banks and insurers.
“Korea needs more manpower equipped with financial expertise in the sector to maximize positive effects of the Korea-EU FTA,” the Finance Ministry report said.
“Designating an area as an international financial cluster where medical and educational services are provided in English would help attract foreign talent.”
By Cynthia J. Kim (email@example.com