Full-Scale Discussions on Easing 'Geumsan Separation' Regulations... Three Expected Scenarios

[Asia Economy Reporter Eunju Lee] Since the government decided to ease the regulation of the separation of financial and industrial capital limited to the ownership of industrial capital by financial capital, it has been gathering opinions from various stakeholders and conducting discussions. On October 26, the Financial Services Commission (FSC) also introduced the detailed progress of the discussions so far at a financial innovation seminar held together with major financial sector associations. So why is the government trying to loosen the separation of financial and industrial capital? And how far have the discussions and considerations on the detailed plans for regulatory easing progressed so far?

Financial Authorities Considering Ways to Ease Separation of Financial and Industrial Capital ... Key Focus on Relaxing Subsidiary Investment Scope and Ancillary Business Restrictions

First, it is necessary to look at what the separation of financial and industrial capital regulation is. Separation of financial and industrial capital is a principle that prohibits financial capital and industrial capital from owning and controlling each other's industries. It was introduced to prevent the privatization of financial companies and to avoid the transmission of risks between different industries. It aims to prevent situations where industrial capital owning a bank expands its other businesses freely using customers' deposits, causing risks to spread to other affiliates. In South Korea, related regulations began in 1995 when the Bank Act included provisions on the separation of financial and industrial capital.

Specifically, the separation of financial and industrial capital regulation is stated in the Korean Bank Act as follows. First, non-financial companies can only hold up to 4% of bank shares, except for exceptions under the Internet-only Bank Special Act (up to 34%). However, the FSC sees the need to ease regulations related to the 'restriction on industrial capital ownership of financial industry.' While maintaining the principle prohibiting industrial capital from controlling financial capital, it believes that regulations related to financial capital owning and controlling industrial capital should be somewhat relaxed.

One regulation is that banks can only have subsidiaries in 15 financial-related fields (banking, financial investment, insurance, mutual savings banks, credit finance, etc.) according to the Bank Business Supervision Regulations. Another is the restriction on the scope of ancillary businesses limited to banking operations. The current Financial Business Act divides financial companies' business scope into core business and ancillary business. Ancillary business is only allowed if it is related to banking operations. If deemed unrelated, it must be designated as a temporary innovative financial service by the FSC. In other words, discussions are underway to adjust the regulations on the scope of subsidiaries that financial companies can invest in and the ancillary business areas they can enter, so that financial companies can more actively adapt to the changing environment.

"Big Blur Phenomenon Intensifies, Need to Resolve 'Regulatory Arbitrage' Between Big Tech and Financial Companies"

This issue has emerged due to the 'big blur' phenomenon. As the boundaries between financial and non-financial sectors become ambiguous, concerns about outdated regulations causing regulatory arbitrage between financial and non-financial companies have spread mainly within the banking sector. Big tech companies have entered the financial industry under exceptions granted by the Internet-only Bank Special Act, operating both financial businesses and non-financial businesses (portals, e-commerce, mobility, etc.). Big tech companies like Kakao and Naver own financial companies among their affiliates, enhancing their competitiveness.

On the other hand, financial companies face strict legal restrictions on entering non-financial businesses, leading to growing concerns about widening competitiveness gaps over time. For example, KB Kookmin Bank launched a budget phone business designated as an innovative financial service by the FSC, but it can only operate temporarily until April next year. Meanwhile, Toss entered the budget phone business by acquiring 100% of the shares of Merchant Korea, a budget phone company, in July. The FSC has recognized this regulatory arbitrage as a potential cause of competitiveness polarization and has started discussions to eliminate discrimination between financial and non-financial companies.

So how far has the scope of regulatory easing progressed? At the 'Financial Regulation Innovation Seminar' hosted by the Korea Federation of Banks on the 26th, the tentative progress of discussions was confirmed. Professor Jeong Soon-seop of Seoul National University Law School, who participates in the task force (TF) operated by the FSC to comprehensively revise the Financial Business Act, introduced three alternatives currently under consideration for easing the separation of financial and industrial capital.

Professor Jeong Soon-seop Proposes Alternatives ... Expansion of Positive List vs. Shift to Negative List vs. Appropriate Hybrid Approach

The first alternative is to ease regulations by expanding the scope of subsidiaries that financial companies can invest in (currently limited to 15 financial-related fields) and the scope of ancillary business industries through amendments to the current supervisory regulations, using a 'positive list' approach. In other words, it maintains the 'positive list' (enumerative regulation) legal definition method, which prohibits everything by default and lists exceptions or non-prohibited matters, but broadens the industries in which investment is allowed. Professor Jeong gave an example of explicitly listing digital businesses or new industries expected to contribute to consumers in the financial industry through general definitions, while explicitly excluding industries where entry is prohibited.

The second alternative is a more comprehensive regulatory easing. Instead of the current positive list regulation that strictly limits ancillary businesses and investable subsidiaries, it proposes switching to a full negative list regulation. Negative list regulation prohibits everything by default and only lists exceptions or non-prohibited matters. This can be seen as a more proactive regulatory easing. However, allowing unlimited entry could undermine the purpose of separating financial and industrial capital, so separate regulations on entry limits per company and a risk assessment process by authorities to prevent risks from spreading to core financial businesses must be introduced. Unlike the first alternative, this would require amendments to the Bank Act.

The last alternative is to appropriately combine the first and second approaches. It applies negative list regulation to the scope of investable subsidiaries and positive list regulation to the scope of ancillary businesses. If the separation of financial and industrial capital is eased in this way, financial companies can actively enter various new businesses. Banks can acquire various non-financial IT companies. For example, KB Kookmin Bank operates the budget phone business 'Livem' under a temporary innovative financial service license, relying on the FSC's approval for business extension. However, if the scope of financial companies' entry expands, they can freely enter non-financial businesses and enhance competitiveness.

The FSC stated that it will listen carefully to industry discussions and consider specific directions for change. Kim Yeon-jun, a manager at the Banking Division who attended the seminar, said, "There are three dimensions to consider: financial company innovation, efficient utilization of financial company human resources, and social contribution by providing better services to financial consumers. Stakeholders may have different opinions from these three perspectives, but the authorities will take a step-by-step approach by broadly listening to opinions and developing tangible alternatives."