The Korean version of tax-efficient savings accounts, which benchmarked a U.K. scheme, went on sale March 15. The government hopes it will boost household wealth amid a rise in “floating money” prompted by low interest rates and uncertainties in the investment market.
A total of 33 financial companies, including banks, securities firms and insurers, have begun introducing their first tax-exempt Individual Savings Account, or ISA, which allows customers to hold a wide range of retail investment vehicles in a single arrangement with a financial company.
“In an era of low interest rates and sluggish growth, the ISA system will particularly help people to increase their assets as it offers tax break benefits and a convenient way of wealth management,” said Hwang Young-key, Korea Financial Investment Association chairman.
With the government-backed scheme, consumers now can hold diverse financial products, such as cash deposits, funds and stock investments, in a single account with tax exemptions of up to five years on their financial gains. Tax breaks range from 2 million won ($1,700) to 2.5 million won per person on interest earnings and dividends made from the ISA.
The Industrial Bank of Korea has been selling ISA products, leaving everything up to the bank, from May 11 following its sale of trust ISA products earlier.
The “bank-run” ISA product is unlike a “trust ISA” product, in that the bank manages the ISA account for customers the same way it would run a tailored investment fund. Another benefit for the ISA product is that customers can open the accounts through the Internet without having to travel to banking outlets.
IBK’s ISA products come in seven types, based on risk factors, from the lowest risk to highest risk. The products in the highest risk category have been excluded from “bank-run” category of ISA products.
In the case of the mid-level products, 40 percent of them were invested in bond-type funds while 30 percent went to growth-type funds; 10 percent were invested in domestic and advanced nations’ value-type funds.
IBK has been using Robo Advisors in the management of the trust type ISA products. Once a month, the robo advisors present a proposal on the division of assets by investment sectors so that the bank’s asset division committee holds quarterly meetings to rearrange the investments of those ISA products. The model portfolios were separated based on investors’ investing patterns and divided into “smart type,” which depends on robo advisors management, and “plus type,” which are managed by investment professionals.
IBK officials said those ISA products will be managed very effectively, as robo advisors and investment professionals will cooperate to effectively manage the products.
The bank plans to make it easy for customers to check the earnings of their ISA products and adapt the portfolio of their ISA products through the I-One Bank, which was introduced in June last year. The I-One Bank a mobile banking facility that customers can use to subscribe to around 200 financial products within 24 hours, including conducting banking transactions as deposits, installment savings and borrowing. Customers can also hold consultations, recommend tailor-made products for individuals and conduct asset management initiatives, among other transactions through the I-One Bank Facility.
Heated competition among banks and brokerage houses over individual savings accounts (ISAs) is entering a new phase, as lenders released discretionary ISA products.
ISAs allow various savings and investment products to be attached to a single account. Taxes are not collected from interest earned or gains from investments in the account up to a set value. A person can only open one account.
There are two types of ISAs — trust ISAs, which allow customers to choose what financial products they invest in, and discretionary ISAs, in which customers choose a model portfolio and give the financial institution discretion on selecting products and rebalancing.
ISAs were introduced on March 14, with the government allowing securities firms to offer both types, while permitting banks to sell trust-type products only, considering time will be needed for lenders newly tapping into retail investment services.
According to the Financial Services Commission (FSC), six banks received regulatory approval for retail investment services and four — KB Kookmin, Shinhan, Woori and Industrial Bank of Korea — will be selling discretionary ISA products from May 16. Two others, NH Nonghyup and KEB Hana, will soon release discretionary ISAs.
Banks have encouraged employees this year to get a license to suggest derivatives to customers, which is essential for the lenders to sell discretionary ISAs whose portfolios may contain equity-linked securities and other derivatives. So far this year, 4,700 people have gained a license, compared with last year's total of 6,900.
