"Financial Companies May Acquire Fintech Firms"…The Principle of Separation Between Finance and Industry 'Shaken'

'Fintech Development Support Act (tentative)' Legislation Underway
"Institutional Measures to Enable Financial Companies to Invest in or M&A Fintech Firms"

[Asia Economy Reporter Park Sun-mi] As financial authorities seek to improve regulations to allow private financial companies to acquire fintech firms, the principle of separating financial capital from industrial capital is being shaken once again.

According to the financial sector on the 27th, financial authorities recognize the rapid growth of fintech as an unstoppable global trend and are pushing for the enactment of the "Fintech Promotion Support Act (tentative name)" to foster domestic fintech companies. The main focus is to establish institutional measures to promote fintech investment by financial companies. Specifically, it is expected to include provisions that expand the scope of fintech companies in which financial firms can invest and exempt executives and employees from liability in cases of losses during the investment process, provided there is no intentional or gross negligence.

Financial authorities anticipate that the enactment of the Fintech Promotion Support Act will open the door for financial companies to engage in mergers and acquisitions (M&A) of fintech firms.

Lee Hyung-joo, head of the Financial Innovation Planning Division at the Financial Services Commission, attended the 'Korea Fintech Week 2021' forum held both online and offline from the 26th to the 28th, stating, "A major challenge for fintech companies is that after growing the business post-startup, it is difficult to exit (recover funds). Currently, due to the strict principle of separating financial and industrial capital, financial companies face restrictions in acquiring IT firms, so the only practical exit route is an initial public offering (IPO)."

He explained, "Through the Fintech Promotion Support Act, we aim to create institutional measures that allow financial companies to invest in or acquire fintech firms."

The current principle of separating financial and industrial capital has been recognized as a representative regulation that confines banks within traditional frameworks and a stumbling block to fintech development. Consequently, criticism has been consistently raised that it does not align with the trend of convergence between finance and IT.

However, if the principle of separating financial and industrial capital is shaken again by the enactment of the Fintech Promotion Support Act, the firewall between financial and non-financial affiliates may disappear, enabling risk transfer from non-financial to financial sectors. There are concerns that large financial companies could acquire fintech firms based on their massive capital strength, potentially undermining the current cooperative structure between financial and IT companies. In fact, in China, where the fintech industry is rapidly growing, there are significant concerns about the stability of financial services caused by fintech firms.

Accordingly, discussions between the fintech market and the principle of separating financial and industrial capital are active in academia. At a forum on "Changes in the Financial Environment and the Regulation of Separation of Financial and Industrial Capital," jointly hosted by the Korean Finance Association and the Korean Financial Information Society the previous day, Professor Jung Soon-seop of Seoul National University Law School advised, "The basis for separating banks and industry, or financial capital and industrial capital, remains valid. The regulation of separating financial and industrial capital should be maintained as a fundamental principle in Korean financial regulatory law, even considering the development of fintech, which represents the convergence of technology and finance."