Disruptive forces

Kwang Bae Park, Hyun Koo Kang and Hwan Kyoung Ko of Lee & Ko assess how fintech deregulation will play a key part of Korea’s fourth industrial revolution movement

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The financial authorities in the Republic of Korea have declared that fintech will be the centre of a great change that will sweep its financial market. They have announced a two-stage development roadmap according to which the financial market would move from the first stage of 'elimination of unreasonable restrictions' to the second stage of 'redesigning the existing system'.

In contrast to the widespread regulations that govern the traditional financial industry, authorities have shown a strong willingness to spur on the fourth industrial revolution in the financial sector, by means of the disruptive innovation brought on by fintech.

In Korea, the foreign exchange system has historically been the realm of the foreign exchange bank. Commencing in the 1990s, however, in line with the liberalisation trend, the foreign exchange sector gradually began to open its doors to financial institutions other than banks. To reflect such a change, the Foreign Exchange Management Act was abolished and replaced by the Foreign Exchange Transactions Act. Nevertheless, the foreign exchange work handled by non-bank financial institutions was still very limited in scope, and these were only allowed to participate in currency conversion.

On April 1 2016, however, the Korean government changed its stance regarding foreign exchange work by financial institutions other than banks from 'permission in exceptional cases' to 'prohibition in exceptional cases,' taking into consideration the increasing number of foreign exchange transactions and the development of the financial sector in recent years.

Further, on January 17 2017, the Foreign Exchange Transactions Act was amended to allow non-financial institutions to engage in the small amount remittance business, for which an amendment will become effective as of July 18 2017. This amendment marks a significant change in the financial industry in Korea. Whereas only banks are allowed to engage in the foreign remittance work at present, once this amendment takes effect, fintech companies will be allowed to enter the small amount remittance business in Korea.

Given the rapid pace of growth of the peer-to-peer lending (P2P) lending market in Korea, there has been an increasing demand for regulating the P2P space to protect the investors. In response, financial authorities in Korea announced the P2P Lending Guidelines on February 27 2017.

The Guidelines apply to financial companies (partner financial institutions) that conduct lending business in connection with P2P lending information brokers (P2P lending intermediary) and stipulate the items that the partner financial institutions need to confirm to conduct the lending business.

Among others, the following are the major requirements that a person intending to engage in P2P business as a P2P lending intermediary should be aware of. As such, a P2P lending intermediary shall: (1) provide various information that can assist the borrower/investor in making its decision to borrow from/invest in a P2P business; (2) not participate in a P2P lending business as an investor; (3) not utilise P2P lending to obtain profit for itself; and (4) in case of default in the repayment of a P2P loan, immediately inform the investor regarding the default and the cause of the default. Also, to prevent investors from substantial loss caused by excessive investments, individual investors shall be subject to certain annual investment limits per P2P lending intermediary.

In response to a growing demand for innovation in financial services through the fusion of finance and internet and communication technologies, the financial authorities in Korea announced a plan to introduce internet-only banks in June 2015. On November 29 2015, financial authorities preliminarily approved Kakao-Bank and K-Bank. The latter obtained a final approval on December 14 2016, and Kakao-Bank is expected to receive the final approval by the start of the second quarter of 2017.

An internet-only bank means a bank that is required to operate by way of electronic financial transactions as stipulated under the Electronic Financial Transactions Act. A user of such an internet-only bank uses financial products/services in an automated manner without engaging in a face-to-face contact or communication with the bank employee. Other than the aforementioned aspects, an internet-only bank may engage in the same types of banking services as traditional bricks and mortar banks.

However, one impediment is that Korea has in place a rigid separation of ownership between banking and non-banking industries. Considering that an innovative IT company would be taking the lead in establishing and operating an internet-only bank, it is difficult under the existing policy framework to construct an efficient ownership structure. Accordingly, a legislative bill aimed at relaxing the application of the policy of separating banking and non-banking industries is presently being discussed in the National Assembly.

Asset management using robo-advisors can be categorised, based on the nature of investors and level of usage with the robo-advisor, in the following stages:

• the first stage where the consulting personnel provides portfolio level advice to clients based on the robo-advisor's portfolio performance;

• the second stage where the operating personnel operates the assets of the clients based on the robo-advisor's portfolio performance;

• the third stage where the robo-advisor, without human involvement, advises clients on the portfolio performance; and

• the fourth stage where the robo-advisor directly operates the clients' assets without human involvement.

Until now, Korea has only been able to enter the early second stage, due to the fact that the Financial Investment Services and Capital Markets Act prohibits a person other than an investment advisor or investment manager to engage in investment advisory or investment management services. However, the Financial Services Committee (FSC) is seeking to amend the Enforcement Decree of the Capital Markets Act to permit the third and fourth stages of the robo-advisor consulting business. Also, the FSC has expressed its intention to implement a regulatory sandbox to test the robo-advisor consulting business in the near future.

In Korea, blockchain technology is in its nascent stage. The Blockchain Committee, composed of financial authorities, consortiums representing various financial sectors and the fintech industry, and industry leaders, was formed to share relevant information and discuss ways to improve the current system. However, it is expected that blockchain technology will be introduced in the financial services sector before other industry areas, and among various areas/matters in the financial services sector, the customer authentication sector appears to be where this technology will first be deployed.

Financial authorities are planning to actively support the introduction/utilisation of blockchain technology in the financial services sector, and are expected to take the necessary measures to improve the regulatory system, in parallel with the pace of development of the technology.

The five major government agencies that handle regulations relating to personal information including the Ministry of the Interior, the Korea Communications Commission, the FSC, and the office of the Prime Minister announced the De-identification of Personal Information Guidelines on June 30 2016 to promote the big data industry and enhance the level of protection of personal information.

According to the Guidelines, personal information that has passed the third stage of the de-identification measures ((i) pre-evaluation, (ii) de-identification measures, (iii) adequacy assessment of de-identification, and (iv) Ex post facto management), will be presumed not to be personal information. Presumption here means that such information will not be treated as personal information unless and until it is proven to be re-identified or re-identifiable. Such information presumed not to be personal information can be used/provided without the prior express consent from the relevant data subject.

However, to be used more widely for the de-identification for the big data industry, the relevant personal information laws and regulations need to be amended to expressly provide a clear legal basis for guidelines. Interested parties should continue to monitor the legislative developments in this area.

In Korea, the authorities that oversee the financial services industry have taken the lead in the efforts to spur the development of the fintech industry. Unsurprisingly, fintech startup companies and existing financial institutions have taken notice and are now entering the fintech market. As such, it is expected that the industry will develop at a rapid pace in Korea. Considering, however, that Korea has a presidential election in May 2017, it would be advisable to monitor the changes in direction and speed of brand new government-initiated regulatory improvements in the fintech industry.

About the author
		Kwang Bae Park Partner, Lee & Ko Seoul, South Korea T:+82 2 772 4343 E: kwangbae.park@leeko.com W: leeko.com Kwang Bae Park is head of Lee & Ko's fintech, data protection and privacy (DPP) practice group and a key partner of its technologies, media and telecommunications (TMT) practice group. He is recognised as one of the foremost lawyers in the DPP, TMT and fintech practice sectors in Korea. He has been recognised as a leading lawyer by various legal assessment institutions including Asia Law (2012, 2014 and 2016), Chambers Asia (2009-2016), and The International Who's Who Legal (2008-2016). He has contributed articles more than 15 times during last five years and made speeches on various topics including fintech, DPP and TMT, and participated in various international or domestic forums.

About the author
		Hyun Koo Kang Partner, Lee & Ko Seoul, South Korea T:+82 2 772 4429 E: hyunkoo.kang@leeko.com W: leeko.com Hyung Koo Kang worked as financial compliance legal counsel for the Financial Supervisory Service from 2002 to 2007 before joining Lee & Ko as a partner in the financial services & compliance team. As an expert in financial compliance, he handles complex banking, securities, insurance and non-banking licences, financial legal compliance issues in connection with credit cards, financial organisation and capital market sanctions, foreign exchange regulations and the resolution of disputes in financial and capital markets. In addition, he has solid experience in M&A of financial institutions and relevant licensing as well as in-depth knowledge of the Electronic Financial Transactions Act and other financial related laws and regulations. He recently joined and advised the Financial Service Commission blockchain TF as a fintech expert.

About the author
		Hwan Kyoung Ko Partner, Lee & Ko Seoul, South Korea T:+82 2 2191 3057 E: hwankyoung.ko@leeko.com W: leeko.com Hwan Kyoung Ko is a key partner in Lee & Ko's data protection and privacy (DPP) and technologies, media and telecommunications (TMT) practice groups. He has extensive experience in advising and representing numerous domestic and foreign companies on matters relating to DPP, TMT and fintech. He is a member of the Statutory Interpretation Deliberation Committee of the Financial Services Commission, and is actively involved in providing legal opinions on various issues relating to the credit information of financial institutions and big data.