Recently I had the chance to dine in Seoul with a senior executive who has had a long career in global banking. He has been based in Thailand and more recently in Hong Kong, which he has watched grow into a major regional financial center.

In view of the frequent demonstrations in Hong Kong that have disrupted business there at times, he asked a very natural question, “Why isn’t Seoul in the running to become a rival financial hub, given Hong Kong’s current problems?”

That was a great question, and I told him that there have actually been efforts in Korea by the government and financial sector-related groups to promote Seoul as a regional financial center. The fact is that business visitors are often impressed favorably with Seoul’s business infrastructure, including the high speed wi-fi that is widely available everywhere in Korea, the modern office buildings, a highly educated workforce and, on top of all those pluses, a modern award-winning airport and a number of top tier hotels with most of the major hotel groups represented

But there has been little if any progress towards that goal. Why is that, given all all the physical support facilities and talented financial workers in Seoul? What has kept Seoul from becoming a regional financial hub?

The answer I would say is the difficulty that foreign financial companies encounter in operating in Korea’s highly bureaucratic and regulatory system.

To illustrate to the visiting exec I recalled what a foreign asset management company said to me several years ago about his company’s experience. He explained that his firm managed the equivalent of about $4 billion in Korea and $40 billion in Japan. In Korea, he said, they needed to file about 4,000 reports with the government – while in Japan, on a portfolio of 10 times what they managed in Korea, they had to file only about 1,000 reports. The point he was making was that the Korean system requires more cost for foreign companies, even when earnings are modest.

Others have different theories. The January 24-27 edition of the Korea Times carried an article headlined, “Korea’s financial hub vision becomes more elusive.” It suggested that the attempt by Korea to become a financial hub was “hampered by management risks associated with rigid labor rules and anti-business sentiment.”

But while those things obviously aren’t positive elements that would prompt foreign executives to want to open an office in Seoul, they do not seem to me to be the primary factor in what is preventing Korea from attracting more foreign financial companies.

As I see it, what has prevented Korea from enticing more foreign financials to participate in the Korean market is really quite simple: It is increasingly difficult to achieve a reasonable return on the investment committed in Korea.

Increasingly we see major foreign participants – such as the US insurance company,Prudential Life – putting their local Korean subsidiaries up for sale so that they can exit the market. The cost of operating a business in Korea has simply been growing at a far greater pace than income growth for many foreign financials that have been in Korea for years. Far from luring newcomers to enter the Korean market, their woes have prompted others to seek opportunities in other Asian markets.

One thing often said about Korean banking as a sector is that it “operates as a very closely supervised utility.” What financial executives mean when they make this comment is that the cost of adhering to the guidelines of the Korean financial regulators is so high that yields on assets are quite low, and opportunities to enhance returns from fee-based financial services rather than traditional lending are very limited.

For years Korean banks have had declining net interest margins despite the fact that by European and US standards, Korean interest rates are positive and expected to remain so. But the revenue growth opportunity in Korean finance is limited, and it really is this limited outlook for earnings growth that hampers Korea’s ability to attract foreign financials into the market.

Only positive changes in the way that the Korean government regulates the financial sector will enable foreign companies to look favorably at invitations to enter the Korean market. I am not overly hopeful that this will happen in the near term. While Korea has shown that it can make rapid changes when necessary, the creation of a financial hub in Seoul doesn’t seem like a priority now. At least that is my perspective from over three decades of Korean market experience.

A difficult market has become even more challenging.

Based in Seoul for over 35 years, Hank Morris has had a long career in the Korean securities and asset management sectors. He was chief manager for several UK brokers and merchant banks and continues to be active in research on Korean financial markets. He is a non-executive director on the board of the Seoul Financial Forum, a non-government body that seeks to enhance the development of the Korean financial sector.