Korea bans trading-linked brokerage rewards

South Korea’s Financial Supervisory Service (FSS) has announced a sweeping ban on brokerage promotions that provide cash, gift certificates or other financial benefits based on trading activity. The new standards, implemented via amendments to Korea Financial Investment Association regulations, will take formal effect on January 1 next year. Securities firms will be prohibited from linking rewards to either the number of trades or the total value of trades, including typical schemes that give investment subsidies above a set trading amount or increase rewards as trading value rises.

Financial benefits covered by the ban extend beyond direct cash and gift certificates to include fees owed to related institutions that brokerages pay on a customer’s behalf. Authorities concluded that tying rewards to trading activity can create conflicts of interest by encouraging investors to trade repeatedly to collect benefits, while brokerages earn higher commissions and investors bear costs and potential losses.

Alongside trading-linked events, the FSS is imposing strict limits on promotions involving high-risk financial investment products. Promotions that offer financial benefits on leveraged and inverse exchange-traded products, exchange-traded and over-the-counter derivatives, investor margin lending and overseas investment products will be banned regardless of whether they are tied to transaction amounts. Programs that pay cash or gift cards to investors who complete mandatory training on leveraged products, or that give cash to new margin trading customers, will also be restricted.

The FSS noted that previously there were no separate rules governing events for products requiring a high level of investor protection, such as leveraged products, investor credit extensions and overseas investments. As a result, investors faced risks including principal loss, debtor repayment obligations and exposure to exchange rate fluctuations. The new institutional ban is intended to address these vulnerabilities by eliminating incentives that draw investors into short-term, high-risk strategies.

Authorities cited examples of overheated marketing competition in the securities industry, including events that offered high-priced prizes such as 100 shares of overseas stocks or cars. In one case, a brokerage ran an event paying up to 5 million won per day based on domestic exchange-traded fund and exchange-traded note trading volumes, with awards scaled to daily trading amounts. During another set of ETF and ETN events, two individual investors traded 3.4 trillion won and 1.7 trillion won in ETFs, receiving 340 million won and 170 million won in prize money.

During the period of those events, 42.8 trillion won of trading took place in the relevant ETFs at the hosting securities firms, out of a total 97.5 trillion won traded in those products. The brokerage involved was estimated to have earned about 51.4 billion won in brokerage commissions from the related ETF trading. Regulators judged that such cash-type events induced large-scale repeated trading, increased investor costs and distorted market trading volumes.

Despite the tighter rules, securities firms will still be allowed to run certain types of promotions. Discounts or waivers of a firm’s own fees and interest will remain permitted across product types, as these are treated as price reductions rather than separate benefits. For ordinary financial investment products, events unrelated to transaction amounts and rewards based on investment balances may also continue.

The FSS has outlined a process to finalize the new standards by revising the Korea Financial Investment Association’s rules on providing property or economic benefits. A prior notice and public comment process on the rule revision bill is planned this month, with completion targeted within the year. An FSS official stated that the institutional ban aims to pre-emptively prevent investor harm and market disruption by curbing promotions that induce short-term, excessive trading and high-risk investing, while supporting continued competition to ease investors’ trading cost burdens.