The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 3, No. 8, October 2015
Effect of Financial Consumer Protection
Enforcement on Financial Product
Investment in South Korean Market
Yang-Kyu Shin* & Jiyeon Kim**
*Department of Data Management, Daegu Haany University, Daegu, SOUTH KOREA. E-Mail: yks{at}dhu{dot}ac{dot}kr
**The Dickson Poon School of Law, King’s College London, London, United Kingdom. E-Mail: ji-yeon.kim{at}kcl{dot}ac{dot}uk
Abstract—Capital Market Consolidation Act (CMCA) of 2009 included the suitability rule to enforce financial
consumer protection in the Korean market. This study investigates whether the implementation of consumer
protection laws affects the investment choice of financial consumers. Empirical analysis was performed on
annual data of individual financial consumer’s investment on financial products, spanning through years prior
to and after the CMCA. Analysis using test of homogeneity revealed statistically significant changes in choice
of financial product types by financial consumers during the year when the CMCA took effect compared to the
year before. In addition, starting from one year following the enactment of the Act, statistically significant
change was shown, indicating that laws to protect financial consumers do indeed affect financial consumers.
Between the gender of financial consumers, the test statistics revealed difference albeit without statistical
significance. And, lastly, measure of association showed significance in a year dependent manner. Of note, the
results are consistent when financial product types are further sub-classified. These results indicate that
financial consumer protection in turn affects the behavior of financial consumers and the financial products in
various manners thereby suggesting that the financial consumers are active effectors in the financial market.
Keywords—Capital Market Consolidation Act; Financial Consumer; Financial Products; Korean Financial
Market; Measure of Association; Test of Homogeneity.
Abbreviations—Capital Market Consolidation Act (CMCA); Information Communication Technology (ICT);
Individual Financial Advisors (IFA); Qualifications and Credit Framework (QCF).
I.
F
INTRODUCTION
AIR competition in the financial market is encouraged
to ensure the protection of financial consumers.
However, excessive competition can lead to negative
outcomes in the market such as degradation of integrity and
disturbance of market order. Ideally, sound and fair
competition in the market and rational reasoning by financial
consumers based on symmetric knowledge would naturally
guarantee consumer protection; yet, the problem is that these
conditions are only fulfilled in an ideal situation. In reality,
not only are financial consumers threatened but also there is
harm to the financial system on a macroscopic level. Prior to
the Global Financial Crisis of 2008, it had been generally
believed that proper national prudential regulation of
financial institutes guarantees the stability of the financial
system and protection of financial consumers. However,
since the financial crisis, it has been revealed that prudential
regulation does not necessarily protect financial consumers.
Therefore, upon this finding, many nations started to
recognize the need to actively protect financial consumers
ISSN: 2321-242X
and implemented new regulations and laws. USA established
an organization exclusively for financial consumer
protection, and UK reformed its “twin peaks” financial
regulation system [Taylor, 3]. In order to protect personal
investors from “mis-selling,” the UK government embarked
on Retail Distribution Review on retail investment products
in 2006 and implemented regulations as a part of the
Financial Services Act 2012 [8]. Under this new regime,
qualification requirements for individual financial advisors
(IFA) became more stringent, from QCF (Qualifications and
Credit Framework) level 3 to QCF level 4, as well as
notification of the payment system thereby further ensuring
consumer protection [12]. In the US, as a response to the
Financial Crisis of 2008 and Great Recession, the Congress
passed the Dodd-Frank Act [4]. Bureau of Consumer
Financial Protection Bureau was newly established under the
Act to regulate consumer financial products and services for
better consumer protection [Kider, 7].
South Korea consolidated all stock related laws that were
in effect since 1962 and implemented the Capital Market
Consolidation Act (CMCA) on February 4th, 2009. In order to
© 2015 | Published by The Standard International Journals (The SIJ)
130
The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 3, No. 8, October 2015
enforce protection of financial consumers, the CMCA
included regulation on investor solicitation and the suitability
rule [Park, 6]. The suitability rule requires that investment
recommendation must be based on reasonable belief that the
investment decision will benefit the client [Wright, 13].
According to the rule, unfairness or incompleteness of the
financial products should be informed by the seller of the
product rather than the investors/consumers. To ensure
consumer protection, product guidance was enforced, and
“know-your-customer rule” required to learn the investor’s
characteristics, such as investment objective, experience, and
assets, and to recommend financial products that are suited to
the consumer when selling financial products. In addition,
regulations for unsolicited calls were introduced so that
consumers are protected from unwanted calls or visits for
investment recommendation. In cases where one financial
investment firm operates several financial businesses, the
firm is required to notify the financial consumers and to
ensure that financial consumer protection is not affected prior
to conducting business.
This study investigates how the legal enforcement of
financial consumer protection by CMCA affected the
investment choice of financial products by financial
consumers in the South Korean market. Based on year 2009
when the CMCA was enacted in Korea, annual data from
year 2008 to 2010 (prior to and after the implementation of
the Act) and year 2012 (when the effect of the Act was
settled) were utilized. Data of investment on financial product
types by financial consumers were empirically analyzed
using test of homogeneity and measure of association. The
term “financial consumer” is derived from investors investing
on financial products and can have varying definitions. This
study uses the definition designated in the World Bank [9,
12] and the CMCA: financial consumer is defined as
individual investors doing transactions with financial firms
and include depositors and lenders.
II.
RELATED WORKS
During her remarks at the Graduate School of Banking at
Colorado in 2012, Sarah Bloom Raskin [10], the US Federal
Reserve Governor, defined the “high road” and “low road”
business model by applying Swinney’s high and low road
model to the financial sector. If the consumer’s choice of
financial product is not (or cannot be) conducted properly, a
poor financial company can provide enticing financial
products and increase market share, which can then lead good
financial companies to join a “race-to-the-bottom” thereby
creating a situation where low road type financial companies
overcome high road type financial companies. This, in turn,
macroscopically leads to the “low road” business model
overpowering the “high road” business model where fair
competition and regulation of the market do not operate,
consequentially destroying the stability of the financial
ISSN: 2321-242X
system. Therefore, nations are emphasizing financial
consumer protection as the choice of financial consumers
greatly affects the financial market [Llewellyn, 1].
Academic studies of the field are emerging as well. Kang
[15] assessed the relationship between competition in the
financial market and protection of financial consumers, and
Kim [5] studied the financial investment firms’ duty to follow
the suitability rule in the context of civil liability.
Mullainathan [2] investigated the effect of financial product
and service choice by financial consumers on financial
companies and found that when financial consumers can
choose financial products or services in a fair and conscious
manner, this triggers sound competition within the industry
thereby leading to healthy development of the financial
industry. Recently, Shin [14] showed that the implementation
of CMCA in the Korean market affected financial consumers
in their financial product choices. Based on these results, this
new study further investigates how enforcement of financial
consumer protection is associated with changes in financial
product investment by product type.
III.
METHODS
3.1. Data
The variables used in this study are proportional investment
on financial products (per product type) and gender of
financial consumers. Financial product types were classified
as: checking and saving accounts (denoted as A); direct
investment products including stocks (denoted as B); indirect
investment products including funds (denoted as C); and
others (denoted as D). Of note, since the study’s objective
was to test for homogeneity, both pension and insurance were
included in the D group in order to ensure consistency when
comparing with the 2008 data, despite increase in investment
on those products after year 2010. In data from 2010 and
2012, the D group is further sub-divided into D-1, consisting
of insurance and pension, and D-2 including other products
excluding insurance and pension, in order to investigate the
consumers’ recent investment trend in insurance and pension
products. The CMCA was implemented on February 4th,
2009; therefore, this study used data from: 2008 (the year
prior to enactment); 2009 (the year of CMCA enactment);
2010 (the year following enactment); and 2012 (three years
after CMCA enactment). The raw data used for empirical
analysis was provided by the Korea Financial Investment
Association’s annual survey on individual and institutional
investors. Financial consumers were classified into three
groups as the following: both male and female (All); male
(Sub1); and female (Sub2). Table 1 presents the percentage of
investment on the aforementioned four types of financial
products (A - D), including the sub-divided groups D-1 and
D-2, by the three groups of financial consumers on an annual
basis.
© 2015 | Published by The Standard International Journals (The SIJ)
131
The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 3, No. 8, October 2015
Table 1: Investment on Financial Product Types by Financial Consumers (Unit: %)
Year
Financial Consumer
Financial
Product
All
Sub1
Sub2
2008
2009
2010
2012
A
B
C
56.6
13.5
24.9
52.6
14.8
24.9
39.1
10.8
17.4
32.8
37.3
15.8
20.2
26.7
D
5.0
7.7
A
B
C
56.5
16.4
21.8
52.7
18.6
21.6
D
5.3
7.1
A
B
C
56.6
16.4
29.5
52.5
18.6
29.8
4.6
8.6
D-1
D-2
26.5
6.3
D-1
D-2
38.9
12.9
16.3
32.0
D-1
D-2
25.4
1.3
36.9
18.6
19.3
25.2
25.6
6.4
39.4
7.7
19.0
34.0
D-1
D-2
23.9
1.3
37.8
11.6
21.5
29.1
D-1
27.9
D-1
27.7
D-2
6.1
D-2
1.4
A, Checking and Savings Accounts; B, Direct Investment Products; C, Indirect Investment Products; D, Others; D-1, Insurance and Pension;
D-2, Others excluding insurance and pension; All, male and female; Sub1, male; Sub2, female.
D
As shown in Table 1, compared to 2008, the year prior to
the CMCA, there is not much difference in investment in
financial product types in 2009 which is the year of the
implementation of the Act. There is only a slight decrease in
investment in checking and saving accounts (A) while
investment on other groups stay relatively constant. However,
in 2010, one year following the implementation of the Act,
there is noticeable change in investment compared to 2009:
investment in checking and saving accounts (A) greatly
decrease, and investment in direct investment products (B)
and indirect investment products (C) also decrease.
Meanwhile, there is an increase in investment in other
products including pension and insurance (D). This trend
continues in year 2012, three years after the implementation
of the CMCA.
3.2. Hypothesis and Analysis Method
This study stems from the empirical hypothesis stating that
the investment characteristic of financial consumers on
financial products types will differ prior to and after the
implementation of the CMCA as well as after the effect of the
Act has settled. This is a matter whether the populations
follow a homogeneous multinominal distribution; therefore,
the test of homogeneity was used. The null hypothesis states
“the characteristic of investment of financial product types by
financial consumers exhibits a constant yearly distribution
regardless of the implementation of Capital Market
Consolidation Act which enforced financial consumer
protection,” and the hypothesis to empirically test states: “the
characteristic of investment of financial product types by
financial consumers exhibits a distinct yearly distribution
regardless of the implementation of Capital Market
Consolidation Act which enforced financial consumer
ISSN: 2321-242X
protection.” Upon acceptance of the empirical analysis, the
association between variables was tested using the measure of
association.
To test the effect of the CMCA, from the raw data
presented in Table 1, data of the four financial product type
groups (A, B, C, D) from the following years were compared:
2008 and 2009 (Case 1); 2009 and 2010 (Case 2); 2010 and
2012 (Case 3). In Case 4, data of the five groups (A, B, C, D1, D-2) from years 2010 and 2012 were compared. Pearson’s
chi-square test statistics was used to primarily test the
homogeneity by year, as the test statistics in the test of
homogeneity is same as that of the test of independence.
Once tested for independence, the strength of association was
measured. Since the variables are nominal variables,
Goodman and Kruskal Lambda () was used as the measure
of association. The  coefficient is used in an asymmetric
contingency table, where the row variable is independent and
the column variable is dependent, when predicting the value
of the column variable while information of the row variable
is absent, in order to measure the how accurate the prediction
of the column variable is upon adding row variable
information. Lambda has the range of 0 to 1, where the
higher value (closer to 1) indicates that the row variable helps
the prediction of column variable.
IV.
RESULTS
Table 2 presents the results of test of homogeneity on the
hypothesis stating “the characteristic of investment of
financial product types by financial consumers exhibits a
constant yearly distribution regardless of the implementation
of Capital Market Consolidation Act which enforced
financial consumer protection.”
© 2015 | Published by The Standard International Journals (The SIJ)
132
The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 3, No. 8, October 2015
Table 2: Test of Homogeneity
Case
Case 1
Case 2
Case 3
Financial
Consumer
Case 4
0.872
19.509
1.822
4.865
(0.832) (0.000)* (0.610)* (0.301)
0.731
20.224
2.294
5.086
Sub1
(0.866) (0.000)* (0.514)* (0.279)
1.505
23.106
1.424
4.599
Sub2
(0.681) (0.000)* (0.700)* (0.331)
Numbers within ( ) indicate p-value, *p<0.05; Case 1, yr 2008 vs. yr
2009; Case 2, yr 2009 vs. yr 2010; Case 3, yr 2010 vs. yr 2012; Case
4, yr 2010 (A, B, C, D-1, D-2) vs. yr 2012 (A, B, C, D-1, D-2); All,
male and female; Sub1, male; Sub2, female
All
As shown in Table 2, the significance values of the test
of homogeneity for Case 1 (year 2008 versus year 2009) are
0.832, 0.866 and 0.681. Therefore, during the year 2009
when the CMCA was enacted, the null hypothesis stating “the
characteristic of investment of financial product types by
financial consumers exhibits a same distribution in years
2008 and 2009” cannot be dismissed with significance level
of less than 5%. That is, despite the implementation of the
CMCA, the financial consumers’ investment in financial
product types are consistent between years 2008 and 2009
Financial Consumer
(significance level 5%). Yet, when Case 2 is tested, the chisquared test statistics values are 19.509, 20.224 and 23.106,
respectively, with significance under significance level 5%,
indicating that following one year of the implementation of
the Act, the characteristic of investment of financial product
type by financial consumers shows distinct distributions
(significance level 5%). In Case 3 comparing years 2010 and
2012, periods after the enactment of CMCA, significance
values are 0.610, 0.513, and 0.700 which are not statistically
significant under significance level 5%. The analysis values
of Case 4, in which the insurance and pension products were
specified as a separate group (D-1), are 0.301, 0.279 and
0.331. When compared with Case 3, the Case 4 significance
values are smaller but not statistically significant under
significance level 5%.
Following the test of homogeneity, the strength of
association between variables was tested using measure of
association. Given the complexity of the analysis, Symmetric
Association hypothesizing no correlative directionality and
Asymmetric Association (Year Dependent) hypothesizing
positive directionality in correlation were both tested. The
results are presented in Table 3 as below.
Table 3: Measure of Association
Case
Case 1
Case 2
Case 3
Case 4
0.021
0.120
0.036
0.036
Symmetric
0.041
0.250
0.080
0.081
Year Dependent
0.21
0.120
0.040
0.040
Symmetric
Sub 1
0.040
0.250
0.090
0.090
Year Dependent
0.018
0.114
0.027
0.027
Symmetric
Sub 2
0.037
0.250
0.060
0.060
Year Dependent
Case 1, yr 2008 vs. yr 2009; Case 2, yr 2009 vs. yr 2010; Case 3, yr 2010 vs. yr 2012; Case 4, yr 2010 (A, B, C, D-1, D-2) vs. yr 2012 (A, B, C,
D-1, D-2); All, male and female; Sub1, male; Sub2, female
All
As shown in Table 3, when the year is taken as the
dependent variable, Lambda () in case 2 are significant.
Interestingly, Case 3 and Case 4, which differ in financial
product type classification, show same values except for the
All - Year Dependent analysis (0.080 versus 0.081). Overall
when consumer genders are compared, Sub 1 consumer
group (male) exhibits stronger association in all cases
compared to Sub 2.
V.
CONCLUSION AND FUTURE WORK
This study investigates the effect of implementation of the
suitability rule on financial consumers by analyzing data from
the Korean market where the CMCA, including the suitability
rule, was enacted in 2009. Empirical analysis was performed
to assess annual change in the investment on financial
product types by financial consumers using test of
homogeneity and measure of association. The analysis
revealed that: first, compared to 2008 (the year prior to the
Act), in year 2009 when the CMCA was implemented, there
was no significance change in the characteristics of
investment. Secondly, significant change was shown starting
ISSN: 2321-242X
from year 2010, which is one year following the
implementation of the Act indicating that the financial
consumer protection law does have a significant effect on
financial consumers after a certain period. Third, the
significance for measure of association differs between the
gender of financial consumers; specifically, male consumers
show stronger association compared to females albeit without
statistical significance. Lastly, when financial product types
are classified in detail to test the significance of insurance and
pension products, there was no difference in measure of
association.
The development and meaningful growth of the financial
sector require strengthening trust by protection of financial
consumers accompanied by innovation of the financial
industry. While the rapid advancement of ICT (information
communication technology) is providing novel methods for
delivering various financial products and services, at the
same time, it is becoming increasingly harder for individual
financial consumers, lacking professional financial
knowledge, to make consciously sound choices and
decisions. As the variety of financial products expands, the
threat
on
financial
consumers
diversifies
and,
© 2015 | Published by The Standard International Journals (The SIJ)
133
The SIJ Transactions on Industrial, Financial & Business Management (IFBM), Vol. 3, No. 8, October 2015
consequentially, can affect the investment characteristics of
the financial consumers. Therefore, the financial sector
should actively prepare for this change and the aftermath
effects. Studies on and understanding of the microscopic
foundation of the effect of financial consumers on the
financial industry are still at its early stages. In addition to
being a component of the market and industry, financial
consumers are active players and effectors of the industry.
Therefore, further investigation should ensure that firmer and
more meaningful foundation is laid for this field with
consideration of both practical and academic aspects and
insights.
REFERENCES
[1]
[2]
[3]
[4]
D. Llewellyn (1999), “The Economic Rational for Financial
Regulation”, FSA Occasional Papers in Financial Regulation.
S. Mullainathan (2009), “Creating a Consumer Financial
Protection Agency: A Cornerstone of America’s New
Economic Foundation”, Remarks before the Banking
Committee Hearing.
M.W. Taylor (2009), “Twin Peaks Revisited: A Second Chance
for Regulatory Reform”, Centre for the Study of Financial
Innovation.
Dodd-Frank Wall Street Reform and Consumer Protection Act
(2010).
ISSN: 2321-242X
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
Kim (2010), “The Duty of Financial Investment Business
Entities to Comply the Suitability Rules for Recommending
Financial Investment Products and the Civil Liability”,
Business Law Review, Vol. 12, Pp. 217–263.
J. Park (2010), “Consolidation and Reform of Financial Market
Regulation in Korea”, International Conference on Financial
Law Reform.
M. Kider (2011), “Consumer Protection and Mortgage
Regulation Under Dodd–Frank”, West.
Financial Services Act 2012 (2012).
The World Bank (2012), “Common Good Practices for
Financial Consumer Protection”, June 2012.
S.B. Raskin (2012), “How Well is our Financial System
Serving us? - Working Together to find the High Road”,
Remarks at the Graduate School of Banking at Colorado.
The World Bank (2013), “Good Practices for Financial
Consumer Protection by Financial Service: Securities Sector”,
June 2013.
The Chartered Insurance Institute (2013), “Policy Briefing: The
UK’s New Financial Services Regulatory Landscape”, April
2013.
I.D.G.D. Wright (2014), “International Finance Regulation:
The Quest for Financial Stability”, Chapter 1, Editor: Ugeux,
G, John Wiley & Sons.
Y. Shin (2015), “Effect of Enforcement of Financial Consumer
Protection on Financial Product Investment”, International
Conference on Social Science.
K.H. Kang (2015), “Functions of Financial Consumer
Protection Agency and Its Design in Korea”, Review of
Financial Information Studies, Vol. 4, No. 1, Pp. 81–100.
© 2015 | Published by The Standard International Journals (The SIJ)
134