Wonil Kim, Myung Soo Lee and Ju Yong Lee of Yoon & Yang discuss crucial regulatory issues in relation to Korea’s fintech industry
As a representative regulated industry in Korea, the financial services industry has continuously maintained a tense relationship with the fintech industry. In 2015, Korea's Financial Services Commission (FSC), prioritising the issue of fintech development, institutionalised various fintechs, including internet-primary banks and crowd funding, and has been providing support for them at national level.
Despite these efforts by the FSC, issues relating to the limitations of the positive system in the financial regulatory reality (in other words, a system that only permits acts listed in regulations and prohibits all other unlisted acts) and complex financial legal structures appear to persist. As a response to this, the industry continues to call for the government's deregulation and support of policy reform.
Registration obligations under the Electronic Financial Transactions Act
Enterprises intending to launch into the electronic financial industry in Korea should, for each category of business, fulfil the stated requirements under the Electronic Financial Transactions Act (EFTA) and register with the FSC. In this respect, the EFTA prescribes that for each category of business, the enterprise should meet the following requirements: (i) hold a minimum capital of between KRW 500 million and KRW 2 billion ($436,000 and $1.7 million), (ii) have sufficient specialised manpower and computer equipment, and, (iii) meet the relevant standards of financial soundness.
It is anticipated that the financial supervisory authorities (the FSC and Financial Supervisory Service (FSS)) will substantially relax the requirements for enterprises from June 2016 as part of their financial regulatory reforms in response to market demands.
Separation of the banking and commerce systems: regulations relating to internet-primary banks
The separation of the banking and commerce systems means limiting an enterprise's financial capital ownership to four percent or less, and is regulated by various laws, such as the Banking Act.
Since the Banking Act has not yet been amended, although the FSC has selected the business operator for internet-primary banks and granted preliminary authorisation to the operator, the operator is likely to experience considerable difficulties in running the relevant business.
Under the Banking Act, (i) an enterprise whose capital ratio in the non-financial sector is not less than 25%, (ii) or an enterprise whose total assets in the non-financial sector is not less than KRW 2 trillion (iii) or an investment company invested in such an enterprise, constitutes a non-financial business operator or industrial capital. Based on this, the non-financial enterprise is limited to owning financial shares of four percent (15% in the case of local banks). However, if the enterprise has received approval from the FSC on the condition that it waives its voting rights, the enterprise may hold 10% of bank shares.
A draft amendment to the Banking Act, which intends to allow non-financial business operators to own 50% or more of the financial shares of internet-primary banks, is pending in the National Assembly. Even though the financial authorities have expressed hopes that internet-primary banks will be operated by the ICT industry, without the amendment to the Banking Act, it is difficult to imagine that the FSC's envisioned concept of internet-primary banks can actually materialise and that such banks would run the business.
Regulations relating to services
The EFTA stipulates (i) the upper limit of the face value of an electronic currency and electronic prepayment means to be issued, (ii) the limits of use of electronic fund transfers and, (iii) the limits of use of electronic debit payment means. In other words, the scope for the amounts of charges and remittances is limited to a small scale due to legal constraints.
According to the EFTA, in the case of (i) electronic currency, the limit is KRW 50,000 and after undergoing self-authentication, the limit is KRW 2 million, (ii) electronic prepayment means, the limit is KRW 500,000 and after undergoing self-authentication, the limit is KRW 200,000 and, (iii) electronic debit payment means, the face-value limit is KRW 100 million and the non-face value limit is KRW 2 million and the provision of services exceeding these amounts is not permitted.
There are no existing relevant acts or subordinate statutes regarding peer-to-peer (P2P) loans. Therefore, P2P loan businesses operate by registering as credit businesses subject to the Act on the Registration of Credit Business, and so on, and Protection of Finance Users (Credit Business Act) or by the roundabout means of affiliating with existing credit businesses, savings banks or local banks.
Generally, P2P loan enterprises run their business by (i) registering the business with the relevant local government entity, and, (ii) using a trade name that refers to 'credit' or 'loan brokerage', depending on the services to be rendered. However, since the FSC announced that from July 2016, the limit for the total assets of credit businesses would be set at within ten times of the capital amount of the credit business, controversy has been raging over the issue of autonomy infringement.
P2P loan enterprises argue that because they do not run the business using their own capital, but merely engage in loan brokerage services, it is unfair to apply the draft amendment to the Credit Business Act to them. However, the financial authorities are adopting a rather impartial stance on the grounds that the safety of transactions or financial soundness of P2P loan brokerage enterprises is questionable and that with respect to the applicability of the draft amendment, an exception cannot be made just for P2P loan brokerage enterprises.
In 2015, the FSC amended the Financial Investment Services and Capital Markets Act (the FSCMA) and institutionalised crowdfunding. However, since the FSCMA prescribes that (i) the investment limit of an ordinary investor per enterprise per year will be KRW 2 million and the accumulated investment amount must not be more than KRW 5 million and, (ii) the investment limit of a professional investor per enterprise per year will be KRW 10 million and the accumulated investment amount must not be more than KRW 20 million, doubts have been cast on whether crowdfunding can reasonably function as a financing window for start-up enterprises.
With respect to other crowdfunding platforms, various regulations apply such as, (i) resale restrictions between investors, (ii) restrictions on share sales by share issuers and major shareholders, (iii) cancellation of the issuance of securities in cases where the minimum amount for subscription falls short, (iv) a ban on the storage of customer property and deposit, and deposit obligations for subscription deposits for crowdfunding enterprises, (v) a ban on the acquisition of intermediary securities for crowdfunding enterprises and, (vi) restrictions on advertising methods. Considering the fact that various regulations apply, even after the institutionalisation of crowdfunding, the scale of the crowdfunding services involved does not appear to be very large.
The Korean government recently passed amendments to the Enforcement Decree of the Foreign Exchange Transactions Act, which permitted 'small-sum foreign currency transfer business'. Consequently, foreign currency transfer services, which were previously permitted only through banks, are expected to extend to insurance and securities firms, and fintech enterprises that have concluded relevant agreements with banks.
However, according to the industry, small-sum foreign exchange transactions using fintech had emerged in order to eliminate elements detrimental to customer convenience, for example, excessive transfer commission and remittance time in transactions between banks. The industry has expressed concerns that if the bank system continues in its present state, the issues of real-name authentication and transfer commission would still remain, precluding the possibility for using fintech technologies.
On the other hand, the Ministry of Strategy and Finance, the competent government authority, explained that the small-sum foreign currency transfer business is not a service that is acknowledged under the applicable laws; and in order for an independent operator who would run foreign currency transfer services to emerge, the Foreign Exchange Transactions Act itself would have to be amended. Further, the Ministry of Strategy and Finance disclosed that in recognising such demands of the market, it planned to submit a bill as early as the first half of next year.
In Korea, finance-related information is regulated from a conservative stance with the simultaneous application of laws, that is, the Personal Information Protection Act and the Use and Protection of Credit Information Act (Credit Information Act). Under the prevailing laws, every time credit information is used for big data, consent needs to be obtained from the credit information provider.
The FSC is pushing forward to amend the Credit Information Act in order to promote big data. Simultaneously, the financial security institute is preparing guidelines for de-identification to enable financial companies to perform big data services.
The Korean government is taking a lead in promoting the fintech industry and is intending to implement various policy reforms. In this respect, the fintech market is expected to expand substantially, and at the same time, a substantial entry by foreign fintech enterprises into the Korean market is to be expected as well.
As demonstrated in the fintech industry as it stands, Korea's financial supervisory authorities have policy plans to achieve innovation in the country's financial regulations by shifting from the existing positive system to the negative system. However, before initiating the provision of services, relevant enterprises may need to scrutinise the development of relevant amendments and prepare business plans accordingly, or provide for potential changes in the business environment.
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Yoon & Yang
About the author
Wonil Kim is a partner at Yoon & Yang. His main areas of practice include intellectual property, broadcasting, and information and telecommunications. He has lectured as a professor at the Patent Training Institute of the Seoul Bar Association and has served as a member of the competition policy advisory board for the Korea Fair Trade Commission. After graduating from Seoul National University College of Law, he received an LLM from the University of Washington School of Law.
Myung Soo Lee
Yoon & Yang
About the author
Myung Soo Lee is a partner at Yoon & Yang. His main practice areas are finance, securities, and insurance. He worked for ten years at the Financial Supervisory Service as the chief of the legal department and corporate disclosure department. He provides expert legal advice on the licensing of financial businesses, supervision and inspection of financial institutions, corporate disclosures, M&A involving listed companies, and unfair trade practices. He has served as a legal advisory member for the Financial Services Commission and as a legal counsel for the Financial Supervisory Service.
Ju Yong Lee
Yoon & Yang
About the author
Ju Yong Lee is a partner at Yoon & Yang. Before joining the firm, he held posts at the Finanical Supervisory Service, including in the non-banking supervision department (supervision of mutual finance, savings banks, credit card companies, finance houses, financial leasing companies, investment banks, credit unions, and more), the enforcement review office, the capital market investigation department 2, the legal affairs office, and more. His main practice areas include legislation regarding finance, M&A, corporate law, corporate advice, and corporate litigation. Based on his expertise in financial regulation and supervision from his positions at the Financial Supervisory Service, Lee is able to provide the realistic, tailored, and comprehensive legal advice that financial institutions and corporations need and has achieved remarkable results in various important litigation cases in the fields of M&A, commerce, finance, securities, and insurance.