[Opinion] The Long Road Ahead for Financial Innovation and the Controversy over the Financial Consumer Protection Act

Seong Hee-hwal, Professor at Inha University School of Law

On September 7th, the financial authorities announced the application policy of the Financial Consumer Protection Act (hereinafter “FCPA”) to online financial platforms, resulting in the suspension of services such as financial product comparison, recommendation, and advertising provided by several fintech platform companies. The reason was that these activities fall under “brokerage” according to the FCPA, and platforms without brokerage licensing or registration cannot handle such services. Although the online platform regulation initiated by Lina Khan is an international trend, it does not align with the recent financial policy direction that emphasized innovation, and it is somewhat surprising to see a shift toward regulation across industries without distinction.

Since the financial industry is inherently a heavily regulated sector, making innovation and creativity difficult to manifest, this measure could cause the financial innovation pursued by venture financial platforms to be stranded and reduce consumer welfare. While there is some agreement on the necessity of reform as big tech platforms, once the epitome of innovation, have now become targets of reform, it is difficult to agree with the strengthening of regulations on domestic online financial platforms for the following reasons.

First, the financial industry is not the “local market” of small business owners. General industries operate under a free competition system with low entry barriers and many small businesses, where increased platform dominance can lead to coercive purchases, forced provision of economic benefits, and unfair damage shifting, i.e., abuse of power. However, financial companies are those that have passed strict entry barriers and are economic powerhouses incomparable to ordinary small business owners in terms of scale and expertise. Therefore, while oligopoly centered on large financial groups can be problematic, it is hard to imagine local markets being infringed upon. Of course, big tech platforms like Naver and Kakao may eventually have some degree of influence over financial companies, but even that is limited compared to non-financial industries, and other financial platforms are merely small-scale ventures.

Second, one of the principles announced by the authorities while strengthening regulations on financial platforms is “same function, same regulation,” a ‘function-based regulation,’ but it is questionable what functions are the same between platforms and financial companies. The core regulatory principle of the FCPA, “same function, same regulation,” aims to promote fair competition among financial companies by applying sales regulations such as suitability principles and disclosure obligations uniformly across deposit-type, loan-type, investment-type, and guarantee-type products, regardless of the nature of the financial company. For example, if a bank sells funds, it must comply with the same sales regulations for investment products as securities companies.

However, what financial platforms do is, in principle, to enable financial consumers to compare products from various financial companies, recommend products suited to consumer preferences, and further facilitate product purchases. In other words, platforms do not compete with individual financial companies but provide a marketplace where various financial companies compete with each other. Therefore, it is difficult to view platforms as performing the same functions as financial companies or competing with them.

Third, the concept of ‘brokerage,’ which is central to this measure, is very ambiguous. The term brokerage, generally understood as mediation or introduction, has no legal definition in civil law, commercial law, or financial-related laws, making it an indeterminate concept. Therefore, it can include not only legally responsible acts such as agency, consignment trading, and representation but also simple consultation, introduction, recommendation, and mediation. It is problematic to excessively expand the application of such a vague and comprehensive concept of ‘brokerage.’ Regulation should be applied only when financial consumer damage is serious or clear.

Until recently, the government has promoted a transition to ‘comprehensive negative regulation’ as a national philosophy to boost economic vitality, and the financial authorities enacted the Financial Innovation Act accordingly, designating over 200 new businesses as innovative financial services (sandbox). To enhance financial consumer welfare and strengthen competition among financial companies, financial innovation through financial platforms should continue to be promoted. There is still a long way to go, and we cannot stop here. Even if the forest looks deep and dark.

Seong Hee-hwal, Professor, Inha University School of Law