Lawmaker Jo pushes bill to end 'opaque high-rate lending' by brokerages

Democratic Party of Korea lawmaker Jo In-cheol, who represents Gwangju's Seo-gu Gap district, said Wednesday he had introduced a bill to amend the Capital Markets Act that would require brokerages to publicly disclose the basis and breakdown of interest rates on settlement-backed loans — products that lend investors their own proceeds from stock sales or fund redemptions before the settlement date.

In the stock market, a gap of several days exists between when an investor sells shares or requests a fund redemption and when the proceeds are actually settled. Brokerages offer settlement-backed loans during this period, lending investors funds against the incoming settlement amount as collateral.

According to Jo, the arrangement is in effect a risk-free loan, since the brokerage already holds the settlement proceeds as collateral and faces virtually no default risk. Despite this, brokerages have repeatedly drawn criticism for charging excessive interest rates of up to 10 percent.

The bill would require investment dealers and brokers — that is, brokerages — to disclose the basis and breakdown of the interest rates they apply when selling loan products backed by settlement receivables from already-sold or redeemed securities. Violations would carry a fine of up to 100 million won ($65,300).

If the bill passes the National Assembly, financial consumers would be able to easily compare interest rates across brokerages, which is expected to spur voluntary rate-cutting competition among them. Transparent disclosure of how rates are calculated would also eliminate the justification brokerages have used to charge excessive rates without reasonable grounds.

A similar effect followed the introduction of a deposit-loan rate gap disclosure regime in the banking sector in 2022, which was designed to curb excessive interest earnings by banks. To avoid being labeled "profiteering banks" in the monthly disclosures, commercial banks voluntarily cut lending rates and raised deposit rates, producing positive results for consumers.

"Structurally, settlement-backed loans carry almost no risk, yet brokerages have been raking in large profits through opaque, high interest rates," Jo said. "By introducing this disclosure regime, we will push for more rational loan rates, rein in excessive interest earnings by brokerages, and restore the rights of financial consumers."