The 'Timeff Incident': The Fair Trade Commission Was Inept and Financial Authorities Were Ineffective [Why&Next]

Serious Damage to Online Commerce Stability
Financial Authorities Highlight Oversight Gaps in 'PG Registered Company' Timf Supervision
Self-Regulation Failed to Work... Fair Trade Commission's Complacent Response
"Interdepartmental Coordination Needed Before System Improvement"

As the e-commerce companies TMON and WEMAKEPRICE face an unsettled payment crisis with damage expected to reach the trillion-won level, the incomplete management and supervision system of electronic financial transactions that undermined the stability of commerce has come under criticism. The Fair Trade Commission's e-commerce regulatory framework, which should have detected and addressed risk factors from years of deteriorating financial soundness in advance, proved incompetent, and the financial authorities' system supervising companies registered as Payment Gateway (PG) providers was ineffective.

The 'Moral Hazard' of E-commerce and the 'Loopholes' in the Management and Supervision System

According to a comprehensive report by Asia Economy on the 1st, this crisis originated from the 'moral hazard' of distribution platforms arbitrarily and actively utilizing transaction payments and the government's lax management and supervision that effectively neglected this issue. E-commerce companies TMON and WEMAKEPRICE leveraged transaction payments generated during the mediation between consumers and sellers as operational leverage for their businesses. This was the result of the absence of an escrow system, where a third party such as a bank holds the payment until the delivery of goods or services is completed before paying the seller.

Because of this, TMON and WEMAKEPRICE effectively borrowed funds interest-free by holding consumers' money for up to about 70 days before settling payments with sellers. Moreover, gift certificates sold at a 7-8% discount were used like commercial paper (CP) that general companies use for short-term financing. The distributors misappropriated these funds obtained through quasi-deposit activities for purposes other than intended.

There were regulations for e-commerce. The financial authorities classified some distributors and platform companies, including TMON and WEMAKEPRICE, as PG providers under Article 28 of the Electronic Financial Transactions Act and included them under supervision. According to Article 42 of the Electronic Financial Transactions Act and Article 62 of the Electronic Financial Supervision Regulations, TMON and WEMAKEPRICE, as registered electronic financial businesses, are subject to various obligations such as regularly reporting related operations and performance to the financial authorities. In particular, Article 63 of the Electronic Financial Supervision Regulations specifies management guidance ratios for PG providers, including maintaining positive net capital and a ratio of low-risk assets to unsettled balances of 100% or more.

Identifying the Blind Spot Between 'Registration' and 'Licensing'

Nevertheless, the Financial Supervisory Service (FSS) was insufficient to prevent the unsettled payment crisis despite early detection of signs of insolvency at TMON and WEMAKEPRICE. This was due to legislative gaps or limitations in regulations concerning registered companies rather than licensed ones. Licensed entities such as banks, securities firms, insurance companies, and card companies must obtain approval through the Financial Services Commission (FSC), but registered companies like PG providers only need to fulfill formal legal requirements and register with the FSC.

If the soundness or liquidity of electronic financial businesses deteriorates, the financial authorities can issue management improvement recommendations, demands, or orders only to licensed companies under Articles 64 to 66 of the Electronic Financial Supervision Regulations. They can also require capital increases or restrict dividend payments under Paragraph 3 of Article 42 of the Electronic Financial Transactions Act, and impose business suspension, license revocation, or fines under Paragraph 4.

In contrast, management measures for registered companies by the financial authorities are limited to signing management improvement memorandums of understanding (MOUs). This is why FSS Governor Lee Bok-hyun mentioned during a National Assembly Political Affairs Committee inquiry that there are no coercive measures such as business cancellation, suspension, or equivalent fines if a company does not comply with the management improvement plan under the MOU.

A Structure Where Commerce Stability Can Be Undermined at Any Time

Although the Fair Trade Commission, Financial Services Commission, Financial Supervisory Service, and Korea Consumer Agency are involved in the e-commerce industry, none have mechanisms to protect settlement payments directly linked to transaction safety. Article 25-2 of the Electronic Financial Transactions Act, which will be enforced next month, requires electronic financial businesses to manage prepaid charges in separate accounts and mandates the FSC to conduct quarterly inspections of management status. However, there are still no regulations concerning sales proceeds of e-commerce platform companies. How to manage payment funds is left to the discretion of e-commerce companies. Governor Lee indirectly expressed regret during the National Assembly Political Affairs Committee inquiry, stating, "There was discussion about a strong regulatory system, but I understand that legislation was enacted focusing on essential matters."

Kim Jeong-cheol, a financial law expert and attorney at Law Firm Woori, explained, "The FSS identified the problem but could not take proper action because there was no institutional mechanism to prevent the crisis in advance." He emphasized, "It is necessary to limit the platform's transaction amount so that it is not excessively larger than operating funds, and institutional support is needed to regulate the use of transaction funds for third-party purposes or the excessive sale of gift certificates."

Fragmented Supervision... Efficiency of the System Also Questioned

There are also criticisms that regulations on e-commerce are fragmented. Jurisdiction overlaps among agencies such as the Fair Trade Commission and Financial Services Commission, and regulations are scattered across the Large-scale Distribution Business Act, Electronic Commerce Act, Electronic Financial Transactions Act, and Specialized Credit Finance Act. Lee Se-hoon, Senior Deputy Governor of the FSS, stated, "This issue involves electronic commerce combining commercial and financial transactions, so there is no system where a single agency can take full responsibility for supervision."

Accordingly, opinions have emerged that the management and supervision system related to e-commerce, including PG providers, should be revised to clearly define roles. Assemblyman Shin Jang-sik of the Innovation Party said, "If the issue overlaps multiple ministries, at least an economic control tower should have played a role," adding, "In this crisis, the roles of the Deputy Prime Minister for Economy or the Chief Secretary for Economic Affairs at the Presidential Office were absent."

An anonymous National Assembly official explained, "Since TMON and WEMAKEPRICE are both sellers and intermediaries, coordination between the Fair Trade Commission and Financial Services Commission is necessary first," and added, "The two agencies need to coordinate legislation regarding the new industry of electronic financial businesses and improve the system based on the results."

Government Admits Mistakes... Late Efforts to Improve the System

[Image source=Yonhap News]

The Fair Trade Commission, the competent authority, only began discussing improvements to the Large-scale Distribution Business Act and Subcontracting Act, which include provisions such as mandatory settlement cycles and the Act on Consumer Protection in Electronic Commerce, after the TMON and WEMAKEPRICE crisis erupted. The Fair Trade Commission, which initially claimed it was outside its jurisdiction and shifted responsibility by blaming 'self-regulation,' ultimately acknowledged institutional shortcomings and started to make improvements.

After the settlement delay crisis on the 8th of last month, the Fair Trade Commission did not take preventive measures such as issuing consumer damage advisories, relying solely on TMON's statement that the issue was a settlement error. Chairman Han Ki-jung admitted that self-regulation policies did not function properly and expressed responsibility for the institutional shortcomings and the crisis, reflecting a complacent response.

The Financial Services Commission also began reorganizing its stance belatedly. Nine days after the confirmation hearing, newly appointed Chairman Kim Byung-hwan presided over an executive meeting and emphasized the need to establish a trustworthy transaction order and strict regulatory system in the fields of e-commerce and electronic payment.

Chairman Kim said, "We must thoroughly re-examine the problems revealed in e-commerce operations and management and supervision from the ground up and promptly prepare institutional improvement measures," adding, "We need to improve the safety management of settlement funds, shorten settlement cycles, and reform business practices unfavorable to sellers and consumers to enhance the credibility of the e-commerce industry. We must also address shortcomings in the management and supervision of PG providers to ensure sound management."