Lee & Ko's Digital Finance Team takes a close look at the establishment of the Financial Regulation Innovation Council, the direction of the financial regulation innovation announced by the Financial Services Commission, and the points to consider in relation to future improvements to financial regulations.

1. Establishment of the Financial Regulation Innovation Council

On July 19, 2022, the Financial Regulatory Innovation Council, a private organization established to promote financial regulation innovation in collaboration between the market and the government, was established. At the first meeting, the financial authorities stated that the Korean financial industry faces the necessity to have digital transformation in response to industrial and technological changes, caused by digital transformation and the so-called "Big Blur" phenomenon. The financial authorities emphasized that in order for the financial industry to develop as an independent industry that is one of the pillars of a dynamic economy, bold financial regulation innovation is necessary. In addition, the authorities stated that they would support the growth of both financial companies and big tech, whether online or offline, enable domestic companies to engage in the same business as global financial companies, and conduct a fundamental review of the existing regulations without any limitations.

Moreover, the financial authorities stated that the Financial Supervisory Service will take the lead in devising an improvement plan regarding the five following primary issues, that have been reviewed based on industry feedback: (i) improvement of restrictions on business scope, and investment in subsidiaries, so that financial companies' IT/platform-related sales and investment in new technologies can be revitalized, with respect to regulations on the separation of finance and commerce, which block the digitalization of the financial industry; (ii) supporting financial companies to develop into financial platforms, through measures including allowing pilots of financial product brokerage services on online platforms; (iii) building infrastructure for digital financial innovation by upgrading My Data, open banking,and regulatory sandbox systems to the next level, and establishing a regulatory system for new digital industries such as virtual assets and fractional investment; (iv) improving the trust system, improving the capital market infrastructure through the introduction of an alternative exchange (ATS), and improving the investment vitality by eliminating inconvenience for investors, and improving the ESG disclosure system; and (v) improving the financial regulators' administration of supervision, sanctions, and inspection to increase the regulatory innovation.

2. Direction of the Financial Services Commission's Financial Regulation Innovation

Background and Objectives of the Promotion

New technologies such as big data, AI, cloud and blockchain are being combined with finance, and the structure of the financial industry is changing with the entry of new players such as fintech and big tech. Factors that determine the competitiveness of the financial industry are changing from human and physical assets and offline branch networks to data and new technology utilization capabilities. As a result, existing financial regulations created in the analog era are not functioning properly for the current digital reality. In addition, due to the recent Big Blur phenomenon, there is a greater need to increase efficiency through regulatory improvement, such as by promoting convergence between the financial industry and the other commercial industries. Therefore, in new fields such as virtual assets, a regulatory system that can induce responsible development of industries is needed. In other words, the government and the market need to work together to find a new regulatory system suitable for the digital era so that the financial industry can actively respond to changes in new technologies and industrial structures.

Against this backdrop, the financial authorities said they would create an institutional base for players to lead the global financial market in the Korean financial industry through innovation in financial regulations.

Direction of Promotion

The financial authorities are expected to first select four major areas, nine major tasks, and 36 detailed tasks to review, focusing on industry requests identified through the demand survey conducted by the associations of the financial sector (June to July). The details are as below.

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In addition, the financial authorities said that they would focus on finding and improving regulations that are acting as a hindrance to realization of specific business models that the market desires. They will also actively seek alternatives that are suitable for the trend of convergence and integration between industries, without assuming the necessity of traditional regulatory frameworks such as separation of banking and commerce.

3. Implications

In the future, financial authorities are expected to improve financial regulations first, focusing on "four major areas, nine major tasks, and 36 detailed tasks." In this regard, there is a possibility that there will be significant changes in regulations related to digital finance. The newly launched Financial Regulatory Innovation Council is expected to continue to discover tasks through collecting opinions from industry associations, industry meetings, on-site visits, and suggestions through the Office for Government Policy Coordination and the Ministry of Economy and Finance; deliberate on key conflicts (between industries and stakeholders); and actively participate in the pan-government regulatory innovation system. Accordingly, it is necessary to observe the trends of regulatory improvement related to the "four major areas, nine major tasks, and 36 detailed tasks", actively submit opinions as appropriate, and discuss them with the relevant industry associations if necessary.