The Financial Supervisory Service (FSS) is considering reforms to strengthen the independence of research reports from securities firms and to establish protections for analysts. This initiative aims to address the prevalent practice of overly positive reports and the issue of external pressure on analysts. However, the effectiveness of these reforms may be challenged, as the existing reporting center has not received any complaints in its nine years of operation, rendering the current system nearly ineffective.
According to the FSS, the 'Unreasonable Research Practices Reporting Center' was established in May 2017 to receive reports of coercion, threats, and undue pressure on analysts. However, since its inception, there have been no complaints filed. Despite the center being operational for nine years, the total number of reports remains at zero.
Industry experts argue that the lack of reports does not indicate the absence of issues. Given the rarity of sell reports, if a report were to be filed, the author could be easily identified. Even if a report is made, there are insufficient means to resolve the issue or sanction the company involved.
In light of the current ineffectiveness of the existing system, the FSS is internally reviewing measures to improve research practices at securities firms. Future discussions on reforms are expected to focus on creating an 'independent research environment' and establishing 'analyst protection mechanisms.' There is a growing need for institutional safeguards to ensure that research activities based on legitimate analysis and opinions are not stifled by external pressures or legal disputes.
Recent backlash from companies and investors regarding certain stocks has also contributed to the discussions on reform. For instance, Samchundang Pharm recently initiated legal action against an analyst who presented an opinion contrary to the company's claims. In 2023, a Hana Financial Investment analyst faced conflicts with some investors after issuing a sell recommendation on EcoPro.
Amid these developments, the trend of 'buy bias' in domestic securities reports remains pronounced. According to the Korea Financial Investment Association, as of the end of March last year, the proportion of 'buy' recommendations among the investment ratings of the top 10 securities firms, based on equity capital, averaged 88.5% over the past year. In contrast, the share of 'sell' recommendations was a mere 0.1%. Only Mirae Asset Securities (0.6%) and Meritz Securities (0.5%) issued sell recommendations among the top firms. The proportion of 'neutral (hold)' recommendations, which are often considered as sell signals, also remained low at an average of 11.4%.
An FSS official stated, "There is a need for mechanisms to protect analysts when they produce legitimate reports," adding, "This is a matter that requires discussion with the Financial Services Commission, and we are reviewing internal measures for improving practices."
* This article has been translated by AI.
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