Burden of Capital Expansion Amid COVID-19
On High Alert Due to Tightening Regulations
[Asia Economy Reporter Kangwook Cho] As the burden of the "Fair Economy 3 Acts (Fair Trade Act, Commercial Act, Financial Group Supervision Act)" increases for companies, the financial sector is also experiencing heightened tension due to a flood of bills that significantly strengthen supervisory functions and pressure financial institutions. Under the pretext of protecting financial consumers through debt forgiveness, collection restrictions, interest rate caps, and more, over 170 financial-related bills have been introduced since the 21st National Assembly convened. Despite concerns about soundness amid the prolonged COVID-19 pandemic, the financial sector, which has actively supported loan maturity extensions and participated in the Korean New Deal Fund project, is lamenting that instead of financial advancement, it is trapped in a corner due to regulatory-heavy legislative amendments.
171 Financial-Related Bills Including Banking and Insurance Since the 21st National Assembly Inauguration
According to the National Assembly Bill Information System on the 22nd, since the inauguration of the 21st National Assembly, a total of 171 financial-related bills, including those concerning banks and insurance, have been introduced. Most of these bills focus on consumer protection, strengthening financial institutions' responsibilities, or empowering labor unions, significantly impacting the financial sector.
In particular, a bill was recently introduced mandating the inclusion of one worker representative on the Executive Candidate Recommendation Committee, which recommends executives of financial companies. This is the "Act on the Governance of Financial Companies" amendment bill, jointly introduced by Justice Party lawmaker Jin-gyo Bae on the 17th. This is the first time that the inclusion of a worker representative on the executive recommendation committee has been mandated. The bill also prohibits committee members from recommending themselves as executive candidates. It includes provisions requiring the Korea Exchange, Korea Securities Depository, and securities finance companies to establish such committees under the Capital Markets Act. Additionally, it mandates an external professional evaluation for reappointment of outside directors of financial companies.
Including Workers in Financial Firms' Executive Recommendation Committees and Punitive Fines up to Three Times Consumer Damage
Earlier, Democratic Party lawmaker Han-jung Kim introduced an amendment to the "Act on the Governance of Financial Companies" that would impose punitive fines up to three times the amount of consumer damages if a financial institution causes losses to consumers due to internal control failures. The bill also specifies the responsibilities and duties of financial institutions and their representatives.
One of the bills attracting attention in the financial sector is the "Financial Consumer Protection Act Amendment." The Financial Consumer Protection Act passed the National Assembly after about nine years since its initial proposal and is set to be implemented in March next year. However, at the time of passage, punitive damages and class-action lawsuits allowing multiple plaintiffs to claim damages were not included. In July, lawmaker Jae-su Jeon introduced an amendment adding punitive damages and shifting the burden of proof for consumer damages onto financial institutions.
Alongside this, there are concerns that lowering the statutory maximum interest rate from the current 24% per annum under the "Interest Rate Restriction Act" could have the adverse effect of pushing low-credit, low-income individuals outside the formal financial system. Democratic Party lawmaker Cheol-min Kim proposed lowering it to 20%, while lawmaker Nam-guk Kim introduced a bill last month to drastically reduce it to 10%. The so-called "Samsung Life Act" by Democratic Party lawmaker Yong-jin Park is also considered a regulatory bill. This amendment requires insurance companies to evaluate affiliated company stocks at market price and dispose of affiliated stocks exceeding 3% of total assets.
President Moon receiving a non-face-to-face report on the participation plan of the financial sector in the Korean New Deal. [Image source=Yonhap News]
Digital Transformation for Survival... Financial Regulatory Bills Are a Hindrance
The financial sector is in an unprecedented state of high alert. Amid the COVID-19 risk, capital adequacy ratio (RBC), implementation of the new solvency regime (K-ICKS), and liability adequacy test (LAT) burdens are increasing, and various regulations are tightening the noose, making the situation worse. Unlike previous National Assemblies, the ruling party holds an overwhelming majority in the 21st National Assembly, so most of the introduced bills are expected to pass smoothly. In a situation where digital transformation of the financial industry has become essential for survival, regulatory bills that excessively restrict operational flexibility are holding the sector back.
Experts express concern that while the government calls for financial innovation and global competitiveness, it simultaneously ignores the changed economic environment and merely rides the political wave of the "supermajority." They warn that pushing through legislation without careful review could cause serious side effects in the future.
Professor Sangbong Kim of Hansung University’s Department of Economics pointed out, "Hastily enacted laws driven by inertia are inappropriate, and when proposing bills, the underlying system and its consequences must be thoroughly considered. For example, if the Interest Rate Restriction Act is amended to drastically lower the maximum interest rate, the loan demand of low-income people may not be met by formal financial institutions, pushing low-credit borrowers into illegal private loans, causing adverse effects."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
