Banks and securities companies will face head-on when Korea introduces later this month individual savings accounts -- a new, tax-effective tool for saving and investing in an era of abysmal interest rates and volatile capital markets.

According to the regulator Financial Services Commission on Friday, a total of 35 institutions – 14 banks and 21 brokerages – are preparing to launch ISA products. Thirty-three will start sale immediately upon the scheme’s official introduction on March 14. 

The envisioned account system, broadly modeled after a U.K. scheme, will allow customers to hold a wide range of retail investment vehicles, such as cash deposits, funds and stock investments, in one single arrangement with a financial institution. There are two types of Korean ISAs, depending on how one wants to make investment decisions. Customers can choose to give professionals discretion to invest their assets for them or just do it on their own.

As securities companies have been engaged in discretionary investment business before, they will be able to launch both types. Banks will not be able to as discretionary investment is a new frontier for them. The FSC decided in mid-February to allow banks to sell discretionary-type ISAs.

“Banks are scurrying in their preparation for discretionary products, but are unlikely to be ready for their sale until the end of March at the earliest,” a bank official said.

Competition to attract ISA customers is already heating up even before the official launch. The new scheme is expected to spark a major move in retail money.

Industry experts expect about 400 trillion won ($332 billion) to go into the new savings and investment platform, luring Koreans who do not know where to put their money, amid a sluggish property market, abysmal interest rates and wobbly stock markets.

ISA providers are now engaging in aggressive marketing, offering gifts, free giveaways and lucky draws for customers. Among items up for grabs are a travel voucher worth 20 million won, a 16-million-won Hyundai Motor compact car Avante and gold bars.

The FSC plans to set up a taskforce team to monitor market practices as it is concerned that the heated race to lure customers could lead to mis-selling, putting customers at risk of buying products unsuitable for their investment needs and risk appetite.

“We adopt a zero-tolerance policy against mis-selling of ISAs, and will sternly deal with any violations,” said FSC Yim Jong-yong.

“One-off events may attract customers but the effects of such strategies will be short-lived. We will establish a profit-comparison system around the end of next month for consumers to evaluate financial entities based upon their performance,” he added.

By Lee Sun-young (milaya@heraldcorp.com)