[Empty Regulatory Innovation] Deeply Ingrained 'Regulation DNA'... "Even Possible Innovations Are Not Allowed"

Board of Audit and Inspection: "Multiple Financial Regulatory Reforms, Insufficient Achievement"
This Year Alone, 8 Administrative Guidance from Financial Services Commission and 10 from Financial Supervisory Service Announced
Most of 18 Economic Sector Requests Also Judged 'Difficult to Accept'

[Asia Economy Reporter Song Seung-seop] The financial authorities' attempts to eliminate unreasonable regulations across the financial industry have been made several times in the past. Nevertheless, industry insiders and experts continue to point out that South Korea's financial regulations are among the 'world's strictest.' There are ongoing voices criticizing the failure to boldly remove unnecessary regulations and the slow pace of implementation. The prevailing view is that as long as the financial authorities' 'regulatory DNA' remains deeply ingrained, a virtuous cycle of innovation and growth will be difficult to achieve.

Repeated Regulatory Reforms... 'Financial Regulation Innovation' Only in Words

Since the International Monetary Fund (IMF) crisis, the government and financial authorities have consistently set financial regulatory reform as a key policy agenda. During the 'Phase 1 and 2 Financial Regulation Reorganization' from 1998 to 2002, the policy aimed to abolish 50% of financial regulations. When the 'Zero-Base Financial Regulation Reform Plan' in 2005 and the 'Financial Regulation Reform Promotion Plan' in 2008 were introduced, they promised ▲ deregulation of registration requirements ▲ private sector-led regulatory reforms ▲ modernization and rationalization of business regulations by sector. In 2014, the Financial Services Commission explicitly stated through the 'Financial Regulation Reform Promotion Direction' that explicit regulations would be re-examined from scratch.

However, contrary to the financial authorities' goals, the effect of regulatory innovation has been insufficient. In 2017, the Board of Audit and Inspection criticized in its audit report on the 'Implementation Status of Financial Regulation Reform' that "the government has repeatedly pursued financial regulatory reforms identified as obstacles to enhancing the competitiveness of the financial industry," but "has not fully achieved the originally intended goals and outcomes." The Board also pointed out that the perceived impact of financial regulatory reforms in the financial market remains low.

The reason the financial authorities' regulatory instincts persist is attributed to administrative convenience. Since there are non-explicit regulations that can be enforced simply and like laws, rather than going through complex legislative processes, the pace of reform implementation is slow. The Board of Audit and Inspection also pointed out, "Improvement of regulations under laws has been delayed compared to plans, raising concerns about a decline in the perceived impact of regulatory reforms," and "Convenient regulatory practices through non-explicit regulations such as administrative guidance or self-regulation still continue."

This issue seems to have repeatedly occurred even after the financial authorities declared a major regulatory innovation in 2019. A representative example is the 'restriction on land trust handling by integrated trust companies.' In 2015, the Financial Services Commission issued administrative guidance prohibiting banks or securities firms from engaging in land trust business. Criticized as inappropriate because it was a regulation without legal basis, it was slated for abolition after legalization. However, due to delays in legalization, it has been extended four times and is still in operation.

New administrative guidance continues to increase steadily. This year alone, the Financial Services Commission announced 8, and the Financial Supervisory Service announced 10 administrative guidances. Among these, excluding extensions, there are 3 and 2 new administrative guidances respectively. Administrative guidance should, in principle, be minimal and should not impose disadvantages for non-compliance. Financial industry insiders lamented, "Which financial company would not follow what the financial authorities recommend or prohibit?" and said, "It is practically equivalent to regulation."

Minimal Removal, Excessive Creation... On the Ground, "No Perceptible Impact"

The financial authorities' announcement to switch to a comprehensive negative regulation system is also commonly viewed by the industry as having insufficient perceptible impact to aid innovative growth. Even if laws are established based on 'comprehensive principles,' when requests for official interpretations or regulatory improvements and relaxations for new business challenges are made, the response often is a 'list-based' answer stating that there are no clear provisions in the law.

Recently, measures like regulatory sandboxes allow businesses to operate for a certain period if conditions are met, but these are temporary and businesses must bear the risk of failure during operations. This is why regulatory innovation attempts are not felt on the ground. Another financial sector official pointed out, "The boundaries of the financial industry are becoming blurred, but the fundamental regulations remain unchanged," and "The number of regulations felt on the ground is increasing, making it seem like the authorities are only paying lip service to innovation."

During the 2019 regulatory reform push, 18 proposals requested by the business community were reviewed, but only 4 were accepted, including alternative suggestions and partially recognized provisions. Requests such as 'adjusting the scope of ancillary business for specialized credit finance companies' and 'establishing a small-scale collective investment business unit under the Capital Markets Act' were representative regulations deemed difficult to accept at the time. A request to allow rejection of credit card payments under 10,000 won was decided for 'mid- to long-term review.'

In the secondary financial sector, there are criticisms that regulations are either further tightened or outdated regulations remain neglected. Due to strict positive regulation application, irrational measures or those far from protecting financial consumers still exist. As non-face-to-face and digital finance expand, there are continuous demands to relax mandatory loan ratios within regions, but progress is slow. Mutual finance sectors are facing tighter regulations following the Korea Land and Housing Corporation (LH) scandal and rising household debt.

Experts agree that without changing the financial authorities' regulatory instincts, it will be difficult to achieve innovation results. Professor Lee Kyung-mook of Seoul National University's Business Administration Department criticized, "New regulatory issues may arise, and some existing regulations need to be eased or abolished, but there is negligence in abolition and reform," adding, "This kind of regulatory innovation is unlikely to help the proper development of the financial industry."

This content was produced with the assistance of AI translation services.