[Regulatory Republic] Rotok Allowed, Fintech Not Allowed... Became a 'New Industry Graveyard' Due to Double Standards

<2>Online Platform 'Partition Regulation'
Similar Business Methods and Services Despite Different Industries...Legal or Illegal Depending on Ministry's Judgment
Regulations Not Found Overseas, Undermining Corporate Innovation Will
Analysis of Top 100 Global Cumulative Investment Startups...31% Face Business Restrictions, 13% Can't Even Start
Government Deciding Market Entry Acts as a Barrier

[Sejong=Asia Economy Reporter Kwon Haeyoung] #Naver Financial, Kakao Pay, Toss, and other domestic fintech (finance + technology) companies partially suspended their online financial product comparison and recommendation services at the end of last year. This was because the Financial Services Commission judged that this service was 'intermediation,' which is prohibited under current laws, rather than 'advertising,' making it illegal.

#Lotoc, an online platform that connects legal advisory service seekers with lawyers, faced multiple service suspension threats last year. This was due to the Korean Bar Association claiming that the services provided by Lotoc constitute 'solicitation and intermediation' prohibited by the Attorney-at-Law Act, thus illegal. However, the Ministry of Justice ruled that Lotoc's service is 'advertising' permitted by law, siding with Lotoc.

The government is applying different standards to newly emerging online platforms in the era of industrial convergence where barriers between industries are breaking down. Although the industries differ, the business methods and services are similar, yet innovative services oscillate between legality and illegality depending on the judgments of different ministries. In particular, the current administration, which has announced policies to foster startups through regulatory innovation such as the introduction of regulatory sandboxes, is criticized for applying regulations not found overseas, thereby dampening companies' innovative spirit.

◆Numerous Regulations Not Found Overseas＝ The prohibition of fintech financial product comparison and recommendation services is a representative example. According to the Financial Consumer Protection Act, which was expanded and implemented in the second half of last year, intermediation by companies not registered as intermediaries is prohibited. The Financial Services Commission views financial product comparison and recommendation services as 'intermediation' and banned the service under the Financial Consumer Protection Act. In particular, insurance product comparison and recommendation are impossible under current law, a regulation not found in countries like the United States or Japan. On the other hand, the government made a different judgment regarding Lotoc. Platforms that allow legal advisory service seekers to search for lawyers and connect with their desired lawyers are considered legal.

Both fintech and Lotoc have similar business structures in that they receive certain fees from product and service providers through advertising or intermediation activities. Lotoc receives money monthly from lawyers under the name of 'advertising fees,' while fintech receives money from financial companies under the name of 'commissions' based on sales performance. Nevertheless, fintech's financial product comparison and recommendation services are banned as 'intermediation,' while Lotoc's services are allowed as 'advertising.' This situation clearly shows that regulations on companies are based on arbitrary interpretations by public officials from different ministries. The government, which should support corporate innovation through deregulation, is instead issuing regulations in a manner described as 'confusing and contradictory.'

Above all, the biggest victims of the fintech financial product comparison and recommendation ban by financial authorities were small fintech companies that the government had actively sought to nurture, rather than large fintech firms. This is because small fintech companies have simpler business structures compared to diversified large fintech firms. Financial Services Commission Chairman Ko Seung-beom belatedly announced plans to consider easing regulations on small fintech companies by separating them from large fintech firms.

The reason the government applies completely opposite standards to essentially the same platform services, such as advertising and intermediation of products and services by fintech and Lotoc, lies in the 'positive regulation' system. While countries like the United States operate on a negative regulation system that only prohibits what is not allowed, Korea mainly uses a positive regulation system where businesses can only operate if explicitly permitted by law. This structure makes it difficult for new industries to emerge as businesses must overcome numerous obstacles such as regulations from various ministries and interpretations by public officials. In fact, services legal overseas are frequently labeled 'illegal' domestically.

◆Ban on Non-Face-to-Face Medical Treatment... Multiple Obstacles＝ According to the '2019 Startup Korea Report' released by the Asan Nanum Foundation, an analysis of the core business models of the top 100 global cumulative investment startups found that 31% of these companies would face restrictions if they pursued business in Korea. Under the domestic regulatory environment, 13 companies were completely prohibited from starting business.

For example, Warby Parker's business model of selling glasses online is still impossible in Korea. Warby Parker's model allows consumers to select five glasses samples on the website, receive them at home, wear them for about 3 to 5 days, and then choose their preferred glasses for custom production and delivery. However, this business is prohibited domestically as it violates the Medical Service Act and related laws.

Non-face-to-face medical treatment was temporarily allowed after COVID-19 but was previously banned only in Korea among the top 15 countries by GDP. As of August 2020, the United States had 773 telemedicine providers, the United Kingdom 73, Canada 50, while Korea had only 2, ranking at the bottom alongside Mexico.

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "The biggest problem is that the government decides whether a business can operate or not, which is a huge burden on the economy. It is desirable to reduce regulations that restrict entry by industry or business type as much as possible."

Professor Lee Sung-yeop of Korea University's Department of Intellectual Property Strategy said, "Although the government is promoting regulatory reforms such as the introduction of regulatory sandboxes, there are still many regulations not found overseas, such as those related to data use, fintech, and the Serious Accident Punishment Act. In the era of industrial convergence, it is necessary to actively promote the abolition of regulations unique to Korea to support corporate innovation and transition the regulatory system from a 'positive' to a 'negative' approach."