[1mm Financial Talk] Kakao Bank MyData Indefinitely Postponed... Hampered by Judicial Risks

Financial Services Commission Decides to Continue Suspension of Approval Reviews
High Likelihood of Review Suspension Continuing in May This Year
SM Price Manipulation Trial Delays New Business Launch as Proceedings Prolong

Kakao Bank's MyData (personal credit information management business) project is being delayed without receiving approval. This is because the financial authorities have suspended the business licensing review due to judicial risks related to Kakao, the major shareholder. If the related trial prolongs to the Supreme Court, the new business itself is expected to be indefinitely postponed.

In November last year, the Financial Services Commission (FSC) reviewed whether to resume the licensing examination for Kakao Bank's personal credit information management business and specialized personal credit evaluation business, and decided that it was necessary to continue the suspension of the review. This was disclosed in the FSC's disciplinary agenda resolution document this month. According to the "Credit Information Use and Protection Act (Credit Information Act)" and others, the agenda was discussed to determine whether to resume the review six months after the suspension (in May last year).

The FSC stated that it had checked the progress of the prosecution investigation into Kakao, the largest shareholder of Kakao Bank, for alleged violations of the Capital Markets Act, and judged that “the prosecution investigation is currently ongoing, and on October 18 last year, Bae Jae-hyun, Kakao's Chief Investment Officer, was detained, so the possibility of a sentence of a fine or higher for violation of the Capital Markets Act cannot be excluded.” Therefore, it announced that it would continue to suspend the review as it is difficult to see that the reasons for suspension have been resolved.

The review was suspended once in May last year. At that time, CEO Bae was under investigation by the prosecution for allegedly manipulating stock prices to set and fix SM Entertainment's stock price higher than the public tender offer price of 120,000 KRW by HYBE, a competitor, to obstruct HYBE's public tender offer during the acquisition process of SM Entertainment. CEO Bae is currently undergoing a first trial at the Seoul Southern District Court.

The trial results are unlikely to be out by May this year, when the decision on whether to resume the review will be made again. The second hearing was held on the 9th, and hearings are scheduled for the 1st and 22nd of next month, but essential procedures such as witness examinations, necessary before a verdict, have not yet been conducted. In such cases, the FSC is expected to postpone the review again.

Under the Credit Information Business Supervision Regulations, the FSC may resume the review if it deems it necessary considering the progress of the lawsuit. However, if the FSC intends to suspend the review until a final judgment is made, even if the first trial verdict is delivered in May, if Kakao or the prosecution appeals or files a final appeal from the second trial to the Supreme Court, the review could be suspended indefinitely.

Among the two parties, Kakao is likely to prolong the trial if a sentence of a fine or higher is imposed. According to the Internet Banking Special Act, if a major shareholder of an internet bank has been punished with a fine or higher for violating the Fair Trade Act or other laws within the last five years, they cannot own more than 10% of the shares. If CEO Bae is sentenced to a fine or higher for stock price manipulation, Kakao would have to sell 17.17% of its 27.17% total stake in Kakao Bank.

However, the longer the trial drags on, the more Kakao Bank faces a dilemma in starting new businesses such as MyData. At the end of last year, Kakao Bank planned to collect consumers' asset and financial investment information through the MyData business to advance its personal credit evaluation model. The purpose was to expand loan customers through model advancement. If the trial results are delayed, Kakao Bank's plans are also expected to be delayed.

Bae Jae-hyun, Head of Investment at Kakao Photo by Yonhap News