Preventing Recurrence of the 'Timeff Incident'... Financial Services Commission to Submit Amendment Proposal After Gathering Opinions on the 23rd

Joint Public Hearing with Fair Trade Commission, Gathering Opinions on Government System Improvement Plan
Plan to Prepare and Submit Amendments Including Electronic Financial Transactions Act to National Assembly
100% Separate Management Obligation for Unsettled Funds... Introduction of Priority Repayment Rights
Basis Established for Corrective Orders, Business Suspension, and Registration Cancellation for Violations

The e-commerce companies TMON and WEMAKEPRICE (TMEP), which caused a large-scale settlement delay exceeding 1 trillion won, have been ordered by the court to commence corporate rehabilitation proceedings. In response, financial authorities are accelerating the preparation of an amendment aimed at preventing a recurrence of the so-called 'TMEP incident' by requiring unsettled funds to be separately managed and promoting sound management of electronic payment gateway (PG) companies.

According to the government on the 18th, the Financial Services Commission (FSC) plans to hold a joint public hearing with the Fair Trade Commission on the 23rd to gather opinions on the government's institutional improvement plan. Based on this, the FSC intends to promptly submit amendments to the Large-scale Distribution Industry Act and the Electronic Financial Transactions Act to the National Assembly. The amendment to the Electronic Financial Transactions Act will introduce an obligation for PG companies to separately manage all unsettled funds and establish grounds for measures if PG companies fail to comply with management guidelines or separate management obligations.

The FSC plans to impose an obligation on PG companies to separately manage 100% of unsettled funds to enhance payment stability. This decision considers overseas cases such as the European Union (EU), the United Kingdom, China, and precedents in prepaid charging legislation.

Unsettled funds will be limited to deposits, trusts, or payment guarantee insurance. Particularly, the previously opaque status of unsettled funds will be disclosed to sellers and publicly announced on the company’s website. However, considering the regulatory compliance burden, for the first year after implementation, 60% of unsettled funds must be separately managed, 80% by the second year, and 100% by the third year.

Legal measures to protect separately managed assets will also be strengthened. The FSC will prohibit the transfer or collateralization of assets, as well as seizure or offsetting by third parties, to prevent infringement of rights over settlement funds. Priority repayment rights will be introduced to ensure that users and sellers can safely protect settlement payments even if a PG company goes bankrupt.

Despite existing monitoring mechanisms for registered PG companies, criticism arose that timely action was not taken. The Financial Supervisory Service (FSS) only requested management improvements from WEMAKEPRICE and TMON starting in 2020 and 2022 respectively, without taking any other measures. The FSS explained that there was no legal basis for enforcement, but voices criticizing the lack of sufficient prior action continued.

Accordingly, the FSC plans to strengthen management and supervision of PG companies by increasing the required capital size proportional to transaction volume. Currently, the capital requirement is 300 million won for quarterly transaction volumes of 3 billion won or less, and 1 billion won for volumes exceeding 3 billion won; these standards will be raised.

In particular, if a PG company fails to comply with management guidelines or separate management obligations, the FSC will establish grounds for phased measures such as corrective orders, business suspension, and registration cancellation. Additionally, if separately managed settlement funds are used or contracted for purposes other than settlement, resulting in non-payment within the settlement deadline, grounds for sanctions and penalties will be established.

The FSC also plans to clarify the previously ambiguous definition of PG business. The essence of PG business is the continuous and repetitive agency of payment settlements between third parties. However, under current law, the definition of PG business is broadly defined to include all settlement tasks, including internal settlements. The FSC believes it is necessary to clarify that cases where payment is received and internally settled as part of a business are not considered PG business.

An FSC official explained, "Including internal settlements for one’s own business within PG business would encompass all sectors where fund settlements occur in economic activities, such as e-commerce, department stores, franchises, construction companies, and highway rest areas," adding, "If financial regulations are enforced on internal settlements, there is a risk of excessive and unreasonable regulation."

[Image source=Yonhap News]

Meanwhile, on the 10th, the Seoul Bankruptcy Court’s Rehabilitation Division 2 (Presiding Judge An Byung-wook) decided to commence rehabilitation proceedings for TMON and WEMAKEPRICE. Along with the commencement, the court appointed former SC First Bank executive Jo In-cheol as the administrator and ordered submission of a rehabilitation plan by December 27. Both companies must submit creditor lists to the court by next month’s 10th and complete creditor registration by the 24th. Han Young Accounting Corporation was designated as the investigation committee to assess the circumstances leading to the companies’ collapse, including liquidation and going-concern values. For the companies to continue operating, the going-concern value must be higher.