[Asia Economy Reporters Song Hwajeong, Lee Changhwan, Song Seungseop] The Financial Services Commission (FSC) is launching the 'Financial Regulation Innovation Council' with private experts to undertake a major reform of financial regulations. The Financial Regulation Innovation Council has selected 36 detailed tasks across 9 key issues in 4 major areas based on industry demands identified through surveys of all financial sector associations: ▲promotion of digital transformation ▲building innovation infrastructure ▲advancement of the capital market ▲improvement of supervisory administration.
The FSC believes that for the financial industry to actively respond to new technologies and changes in industrial structure and continue growing, the government and market need to jointly explore a new regulatory framework suitable for the digital era. It plans to prioritize reviewing and promoting 36 tasks that hinder the realization of specific business models. Asia Economy will provide a detailed introduction to the 36 innovative financial regulations selected by the FSC.
◆ Promotion of Digital Transformation in the Financial Industry = Promote the convergence of financial and non-financial services and data through improvements in the separation of banking and commerce system and activation of non-financial information utilization.
<1>Relaxation of Subsidiary Investment Restrictions
Ownership of non-financial subsidiaries by banks is restricted under the Bank Act, and ownership by financial holding companies is restricted under the Financial Holding Companies Act. Article 37 of the Bank Act stipulates that "a bank may not own more than 15% of voting shares of another company." Due to this, financial companies such as banks have been criticized for being unable to own non-financial subsidiaries with technological capabilities, which puts them at a disadvantage against big tech in platform competition.
<2>Relaxation of Regulations on Ancillary Businesses of Financial Companies
Under current law, banks are allowed to conduct 35 ancillary businesses related to their core banking operations such as loans and deposits or newly permitted businesses reported to the FSC. Except for cases approved by the FSC for corporate restructuring, bank subsidiaries are limited to 15 business types listed in banking supervision regulations. Financial companies have been temporarily operating ancillary businesses not permitted under current law by being designated as innovative financial services under the FSC's regulatory sandbox.
<3>Advancement of Insurance Services through Utilization of Non-Financial Information
If regulations on the use of non-financial information are relaxed for insurance companies, they can enhance insurance services using such data. The current Insurance Business Act restricts insurance companies' subsidiaries or ancillary businesses to activities related to insurance, limiting the use of non-financial information. If this restriction is lifted, insurance companies could expand healthcare businesses using public medical data and extend into various non-insurance related businesses using non-financial information.
<4>Improvement of Data Utilization Regulations for Card Companies
The card industry has raised issues that the scope of credit information protection obligations under the Specialized Credit Finance Business Act is broader than that under the Credit Information Act governing MyData operators. As a result, card companies must obtain separate consent from credit information subjects even when providing or using credit information of individuals and corporations to third parties. The industry views this as a disadvantage compared to MyData operators in other sectors. Additionally, obtaining individual consent from each merchant when using merchant sales data is considered a burden.
<5>Improvement of Outsourcing System
Under current regulations, banks cannot outsource essential tasks such as deposits, payments, and foreign exchange except for exceptions. Various business models are possible, such as outsourcing credit evaluation to platforms that can use commercial information or outsourcing real estate collateral evaluation to IT companies with big data on real estate values, but outsourcing of essential tasks is prohibited, allowing only temporary operation under the regulatory sandbox.
<6>Improvement of Non-Face-to-Face Real-Name Verification System
Facial recognition and blockchain technologies have been excluded from non-face-to-face real-name verification methods under the Real Name Financial Transactions and Confidentiality Act, leading to criticism of lagging behind technological advancements. Reflecting improvement demands, since 2020, the financial authorities have allowed corporate employees or agents to open corporate accounts non-face-to-face and foreign customers to open accounts using foreign registration cards. Non-face-to-face real-name verification services are designated as innovative financial services, but Article 3 of the Real Name Act, which states "financial companies must conduct transactions under the real name of the trader," is considered a clause with many regulatory exceptions.
<7>Improvement of Insurance Regulations Using Digital Technology
The FSC is discussing allowing insurance companies to use various digital solicitation methods such as artificial intelligence (AI) and 'hybrid face-to-face and non-face-to-face' methods when selling insurance products. This includes permitting AI voice bots to fulfill telephone explanation obligations or hybrid solicitation where product recommendation and explanation occur by phone, while contract confirmation and application signing are done via mobile. The FSC plans to pilot this through the regulatory sandbox and then consider institutionalization.
<8>Activation of Healthcare Services by Insurance Companies
Current laws provide grounds for insurance companies to operate healthcare services as subsidiaries or ancillary businesses but impose limits on business scope. Activities such as genetic testing and pharmaceutical delivery services are not allowed. Insurance companies request broader interpretation of business scope when reporting subsidiaries or ancillary businesses to operate various healthcare services. They also seek permission for related services (genetic testing, installation and operation of sports facilities), import and sale of healthcare-related products, and B2B businesses (healthcare platform development and sales to companies) beyond B2C.
<9>Improvement of Digital Universal Bank-Related Systems
A digital universal bank integrates various services such as banking, insurance, and securities into one app within a financial group, but restrictions on information sharing among affiliates act as regulatory barriers. To recommend customized products like cards, insurance, and securities on an integrated app, sharing customer information among affiliates is necessary, but even with customer consent, sharing is difficult. Earlier this year, the FSC announced plans to improve related systems to realize digital universal banks.
<10>Review of Introduction of Financial Product Brokerage via Online Platforms
The FSC views that existing regulatory frameworks cannot satisfy consumers' desire to conveniently use various financial services through platforms. It plans to pilot and verify financial product brokerage services via online platforms. Currently, only loan products are allowed; designation of regulatory sandbox for deposit and insurance products is under consideration.
<11>Activation of Platform Business by Card Companies
The FSC plans to enable big tech and card companies to provide account services by promoting 'electronic funds transfer business' (hereafter EFT business). Initially, the amendment to the Electronic Financial Transactions Act included 'comprehensive payment settlement business' (hereafter CPS business), but it stalled due to opposition from banks. CPS business allows non-bank operators to open accounts like banks and conduct electronic funds transfer. Recently, the FSC is reviewing activating EFT business that opens accounts through partnerships with banks, excluding CPS business from the amendment.
<12>Relaxation of One Company One License Regulation within Insurance Groups
Previously, only one life insurance and one non-life insurance license were granted per affiliate and financial group, with exceptions for separate sales channels allowing multiple licenses. For example, Kyobo Life (no online sales) and Kyobo Life Planet (online sales only), Hanwha Non-Life (no online auto insurance sales) and Carrot Non-Life (online auto insurance sales only). However, considering overseas cases (Japan, Australia, etc.) where multiple insurance companies within the same group operate with specialized strategies by customer, product, and channel, Korea is expected to pursue flexibility in the one company one license policy.
◆ Building Innovation Infrastructure for Digital Finance = Promote innovation based on data, artificial intelligence (AI), and new technologies such as MyData, open banking, and regulatory sandbox. Also, establish a balanced regulatory framework to guide responsible growth of digital new industries like virtual assets and fractional investment.
<13>Expansion of Information Provision Scope for MyData Advancement
The industry has continuously requested expansion of the information provision scope for MyData. Banks must provide detailed financial transaction information including personal motives for remittance, but big tech provides only broad categories like electronics, clothing, and food and beverages, mostly classified as 'others,' resulting in banks not receiving meaningful information and pointing out information imbalance. The financial authorities plan to announce measures to expand MyData provision scope in the second half of the year.
<14>Improvement of Network Separation and Cloud Regulations to Promote New Technology Adoption
Excessive cloud and network separation regulations have been criticized for hindering adoption and utilization of digital new technologies. Unclear standards and excessive reporting procedures limited flexible response to cloud demand by financial companies. Network separation regulations introduced in 2013 after a major financial IT accident require physical separation of internal and external networks, restricting access. Uniform physical network separation without considering company or task differences has reduced efficiency in development and hindered innovative technology use. The financial authorities plan a comprehensive review of cloud and network separation regulations and phased institutional improvements to prepare for potential financial IT accidents.
<15>Expansion of Open Banking to Open Finance (Expanding Participating Sectors, etc.)
Open finance extends open banking, which standardizes bank accounts and remittance networks for use on a single infrastructure, to the entire financial service sector. It aims to create an environment where anyone can fairly provide a wide range of services by expanding the open banking platform to the entire financial market. The FSC plans to expand participating institutions to include insurance companies and extend services to insurance information, loan, and Individual Savings Account (ISA) information.
<16>Enhancement of Predictability and Substance of Regulatory Sandbox
The regulatory sandbox temporarily exempts existing regulations to allow companies to test new products and services using new technologies when market launch is impossible due to regulations. Over three years, 632 approvals have been granted. However, there are calls for improvements due to long approval times and lack of deadlines for regulatory amendments after testing, causing uncertainty. The financial authorities plan to introduce review deadlines for faster approval and improve processes to promptly amend regulations once safety and effectiveness are verified.
<17>Enactment of Digital Asset Basic Act
According to the government task implementation plan released by the Presidential Transition Committee in May, the government plans to prepare a draft Digital Asset Basic Act within this year and enact the law by next year. The FSC aims to create an environment where investors can safely invest in digital assets and allow domestic virtual asset issuance (ICO) with investor protection mechanisms. Currently, domestic ICOs are prohibited, so ICOs are conducted only overseas.
<18>Establishment of Digital Securities Regulatory Framework
The FSC plans to establish regulatory frameworks based on the economic substance of virtual currencies, distinguishing between securities-type and non-securities-type. Securities-type virtual currencies will be issued under the Capital Markets Act with investor protection mechanisms, and the regulatory framework will be established accordingly. The regulatory sandbox will be used as needed. For non-securities-type virtual currencies, regulatory frameworks for issuance, listing, and prevention of unfair trading will be developed through discussions on bills pending in the National Assembly.
<19>Review of Allowing Financial Companies to Engage in Virtual Asset-Related Businesses
The FSC is also considering allowing financial companies to engage in virtual asset-related businesses. Banks have argued for adding virtual asset business to ancillary businesses under the Bank Act to allow reputable banks to enter the virtual asset sector. Banks point out frequent unfair trading such as wash trading on cryptocurrency exchanges and emphasize that the forthcoming virtual asset business law should allow banks to enter all defined sectors.
◆ Advancement of Capital Markets = Expand autonomy and competition among capital market participants through improvements in trust systems and introduction of Alternative Trading Systems (ATS), and promote investment demand by refining capital market systems. Also, reduce burdens on listed companies regarding accounting, auditing, and listing maintenance.
<20>Activation of Public Offering Funds
The FSC announced measures to enhance competitiveness of public offering funds early last year, including incentives for asset managers' own investments and performance-based fees, activation of online sales, introduction of foreign currency-denominated MMFs for product diversification, and activation of information provision for investor fund selection. However, the industry pointed out that these measures alone are insufficient to revitalize the depressed public offering funds and called for additional incentives such as tax benefits for long-term investment funds.
<21>Expansion of Trust Property Scope and Strengthening Autonomy in Trust Management
In response to criticism that trustable property is limited, the FSC plans to expand the scope of trustable property and strengthen autonomy in trust management. According to the Enforcement Decree of the Capital Markets and Financial Investment Business Act, trust companies can only accept ▲money ▲securities ▲monetary claims ▲movable property ▲real estate ▲rights related to real estate such as superficies, leasehold rights, claims for transfer of ownership registration, and other real estate-related rights ▲intangible property rights (including intellectual property rights). Other properties cannot be accepted.
<22>Expansion of Autonomy for Sales Companies in Setting and Receiving Fund Sales Fees
Sales companies such as banks and securities firms receive sales fees and commissions for selling funds. Unlike sales commissions charged to investors, sales fees are received as continuous service fees within 1% of the average annual fund assets. Asset managers set sales fee rates through collective investment regulations, and all sales companies receive the same fees accordingly. This system reduces incentives for sales companies to discount fees. The FSC is promoting a plan to allow domestic banks and securities firms to autonomously set and receive sales fees from customers for public offering funds.
<23>Introduction of Alternative Trading Systems (ATS)
ATS refers to various types of trading platforms that replace stock trading functions of regular securities exchanges. Unlike regular exchanges, ATS do not perform listing reviews or market surveillance but only handle trade execution. Although legal grounds for ATS were established in 2013 and attempts have been made, regulatory volume limits, profitability concerns, and political opposition hindered progress. In 2019, the Korea Financial Investment Association and seven major securities firms formed an ATS establishment preparation committee, completed preliminary approval and corporate establishment this year, and aim to start operations in early 2024.
<24>Refinement of Capital Market Systems to Meet Global Standards
There have been criticisms that capital market regulations, such as disclosure requirements, do not meet global standards, causing inconvenience to investors. The FSC plans to refine market systems to align with global standards and develop advanced capital markets.
<25>Relaxation of Bond Market Investment Environment Regulations Including Expansion of Customer RP Collateral
Repurchase agreements (RP) are bonds sold by financial institutions to customers with a repurchase condition at a later date with interest. Customer RP refers to RPs sold to general customers. The FSC plans to relax regulations to improve the bond market investment environment, including expanding collateral for customer RPs. In 2019, in response to criticism that the scope of foreign currency assets eligible for customer RPs was narrow amid increasing foreign currency assets of financial investment firms, the scope was expanded from 'A-rated or higher foreign government bonds' to include 'A-rated or higher international financial institution bonds' and 'foreign currency-denominated bonds of domestic high-quality companies (KP bonds).'
<26>Rationalization of Over-the-Counter (Unlisted Stock) Trading Regulations
According to the FSC, trading of unlisted stocks can only be legally conducted through regulated markets such as K-OTC (Korea Over-the-Counter Market), companies granted regulatory sandbox exemptions, and licensed investment brokerage firms including general securities firms. The FSC plans to comprehensively review regulations related to unlisted stock trading and improve them by rationally relaxing existing regulations.
<27>Improvement of Foreign Investor-Friendly Disclosure Systems Including English Disclosures
According to the Korea Exchange, English disclosures by listed companies on the KOSPI market increased by 107.8% to 1,600 cases last year. English disclosures have doubled compared to the previous year due to support services provided by the exchange and are becoming established. The exchange provides English translation support services for Korean disclosures of listed companies to address the lack of English investment information, which is one factor in the domestic capital market's undervaluation.
<28>Refinement of ESG Disclosure System
In January last year, the FSC announced a 'Comprehensive Improvement Plan for Corporate Disclosure Systems' mandating ESG (Environmental, Social, Governance) disclosures for KOSPI-listed companies with assets above a certain scale. From 2025, disclosure obligations will apply to KOSPI-listed companies above a certain scale, expanding to all KOSPI-listed companies by 2030. The FSC plans to refine related systems ahead of mandatory ESG disclosures.
<29>Rationalization of Prohibition on Accounting Firms Providing Advisory Services Related to Financial Statement Preparation
The External Audit Act prohibits accounting firms from providing or responding to advisory requests related to accounting treatments in financial statement preparation. However, considering difficulties faced by small and medium enterprises in preparing financial statements, the FSC plans to rationalize related regulations.
<30>Exemption of External Audit for Internal Accounting of Small Listed Companies
From 2023, all listed companies are subject to external audits of internal accounting control systems, but small listed companies argue that the burden outweighs the benefits. The FSC plans to consider exempting small listed companies from external audits of internal accounting.
<31>Rationalization of Delisting Criteria
The Yoon Seok-yeol administration's national agenda includes revising delisting criteria. The plan is to carefully decide delisting considering companies' recovery potential and to strengthen investor protection by implementing delisting in stages. To this end, criteria will be tightened to prevent delisting of companies with profitability and listing sustainability, and a more detailed management system before delisting will be expanded, including designation as management stocks and transfer to over-the-counter markets.
◆ Improvement of Supervisory Administration = Review and improve administrative guidance, supervision, sanctions, and inspection practices, and actively support overseas expansion of financial companies to broaden financial territory. Relevant tasks include <32>innovative improvement of financial administrative guidance, <33>improvement of supervision, inspection, and sanction administration, <34>improvement of reporting procedures related to overseas expansion of financial companies, <35>provision and support of essential domestic and international information related to overseas expansion, and <36>rationalization of major shareholder regulations including scope of related parties.
Reforms will be implemented not only in industry but also in supervision. The demand for supervisory administration improvements was stronger than requests for innovation infrastructure, reflecting strong voices from the financial sector. The Korea Federation of Banks advocated allowing bank outside directors to concurrently serve as outside directors of non-affiliated companies and permitting compliance officers to concurrently serve between foreign financial companies and domestic branches. The Credit Finance Association requested expanding recognition of 'risk management officer qualifications' under the Governance Act, and the Korea Federation of Savings Banks requested easing conditions for small financial companies eligible for special treatment.
Supervisory, inspection, and sanction practices are also expected to change. The Korea Federation of Banks requested narrowing the scope of document submission to what is necessary for inspection purposes and allowing re-rebuttals after the inspection department's rebuttal in sanction hearings. The Life Insurance Association also urged improvements in basic document and penalty imposition standards.
Additionally, improvements are expected in reporting procedures related to overseas expansion of financial companies and rationalization of regulations imposed on major shareholders, including the scope of related parties.
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