Deep-Rooted Financial Authorities' 'Regulatory Instinct'... Regulations Increased Despite Calls for Innovation (Comprehensive)

838 Legal Regulations... 0 Abolished, Total Increased by 49
Board of Audit and Inspection: "Multiple Financial Regulation Reforms, Insufficient Achievements"
This Year Alone, 8 Financial Services Commission and 10 Financial Supervisory Service Administrative Guidance Announced

[Asia Economy Reporter Song Seung-seop] Although the government declared it would boldly dismantle outdated compartmentalized regulations to promote financial innovation, it has been confirmed that the overall volume of regulations has actually increased over the past two years. Critics argue that while existing regulations were only slightly adjusted, new regulations were significantly increased, thereby diminishing the capacity for innovation.

According to data submitted by the Financial Services Commission (FSC) to Rep. Yoon Doo-hyun of the People Power Party on the 9th, the number of “explicit financial regulations” maintained as of May reached 838, up from 789 two years ago. A total of 132 regulations were identified for improvement through the FSC’s “Integrated Financial Regulation Innovation Promotion Meeting” in May 2019. Among these, none were abolished, and most were only reorganized or relaxed.

Regulations on financial companies are broadly divided into explicit financial regulations defined by law and implicit financial regulations (such as administrative guidance and self-regulation). Administrative guidance refers to administrative acts where financial authorities provide guidance, recommendations, or advice to financial firms, while self-regulation means internal regulations operated by financial associations through member consensus. Financial companies effectively comply with implicit financial regulations as if they were legal regulations.

Two years ago, the FSC planned to abolish or improve regulations if their necessity could not be proven during the meeting. Even if retained, the plan was to switch to a “comprehensive negative” approach that classifies and defines regulations flexibly. At the time, Kim Yong-beom, the vice chairman who presided over the meeting, expressed determination, saying, “We will boldly dismantle outdated compartmentalized and positive regulatory systems that hinder startups and innovative attempts.”

Delayed Legislation Increases Administrative Guidance... "Progressive Regulatory Innovation Needed"

Overview of Financial Administrative Guidance. Photo by Financial Supervisory Service

The number of administrative guidance cases also increased slightly from 39 to 40 during the same period. Although administrative guidance is advisory, most financial firms regard it as ambiguous “shadow regulation,” and authorities planned to abolish many of them. Accordingly, eight were abolished, and 22 were scheduled for abolition after legislation. Due to delayed legislation and the increase of new regulations, the total volume of regulations grew even larger.

New administrative guidance continues to increase steadily. This year alone, the FSC announced eight, and the Financial Supervisory Service (FSS) announced ten administrative guidance cases. Among these, excluding extensions, there are three and two new administrative guidance cases respectively that did not previously exist. 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 recommendations or prohibitions from financial authorities?” and added, “It is effectively the same as regulation.”

The financial authorities consider this a natural phenomenon. An FSC official explained, “It is difficult to completely eliminate provisions, and even if not abolished, many regulations have been improved,” adding, “It is natural for the number of regulations to increase over time.”

However, a closer look at the improvements reveals that many measures were related to “legislation” or “clarification” rather than regulatory relaxation. In the case of self-regulation, out of 282 cases, excluding 171 marked as not applicable, 14 were abolished and 97 improved. Some of the improvements counted included “specifying standards” or “legalizing calculation methods,” which critics say are far from regulatory relaxation.

The lack of active implementation of regulatory reform, contrary to initial announcements, has been observed in the past as well. Since the International Monetary Fund (IMF) crisis, the government and financial authorities have consistently set financial regulatory reform as a major policy task. 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 ▲reorganization of registration regulations ▲private-led regulatory reform ▲advancement and rationalization of business regulations by sector. In 2014, the FSC directly stated through the “Financial Regulation Reform Promotion Direction” that explicit regulations would be reexamined from scratch.

However, contrary to the goals of the financial authorities, voices criticizing the insufficient effects of regulatory innovation dominate. In 2017, the Board of Audit and Inspection (BAI) criticized in its audit report on “Financial Regulation Reform Implementation” that “the government has repeatedly promoted financial regulation reform, identified as an obstacle to enhancing the competitiveness of the financial industry,” but “has not sufficiently achieved the originally intended goals and outcomes.” The BAI also pointed out that the perceived impact of financial regulation reform in the financial market is low.

The reason why the regulatory instinct of financial authorities does not disappear is attributed to administrative convenience. Since implicit regulations can regulate simply and effectively like laws without going through complex legislative processes, the pace of reform implementation is slow. The BAI also pointed out, “There is a risk that the perception of regulatory reform will decline due to delays in improving legal regulations,” and “Convenient regulatory practices through implicit regulations such as administrative guidance and self-regulation still persist.”

Minimal Abolishment, Massive Creation... Industry Says "No Tangible Impact"

The "Administrative Guidance on Restrictions for Land Trust Handling by Dual Trust Companies (Extended Implementation)" announced for extension last August. Photo by Financial Services Commission

This problem 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 mixed-trust companies.” In 2015, the FSC created administrative guidance prohibiting banks or securities firms from handling land trusts. Criticized as inappropriate because it was not based on law, it was listed as a target for abolition after legislation. However, due to delayed legislation, it has been extended four times and is still in operation.

The financial authorities’ announcement to switch to a comprehensive negative regulation system is also commonly viewed by the industry as lacking sufficient impact to aid innovative growth. Even if laws are established on the premise of “comprehensiveness,” when requests for interpretation or regulatory improvements and relaxations for new business challenges are made, the response is often a “listing” style answer that there are no clear provisions in the law. A financial industry insider said, “The boundaries of the financial industry are becoming blurred, but the essential regulations remain unchanged,” and criticized, “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 promotion, 18 proposals requested by the economic sector were reviewed, but only one (private equity funds and professional investor provisions) was fully accepted. Two regulations were accepted with alternatives proposed, one partially accepted, and one under mid- to long-term review. The rest were judged as difficult to accept. Representative regulatory requests judged difficult to accept at the time included “adjusting the scope of incidental business for specialized credit finance companies” and “establishing a small-scale collective investment business unit under the Capital Markets Act.”

Experts agree that it is difficult to achieve innovation results unless the regulatory instinct of financial authorities changes. Professor Lee Kyung-mook of Seoul National University’s Business School criticized, “New regulatory issues may arise, and some existing regulations need to be eased or abolished, but there is neglect in abolition and reform,” adding, “This kind of regulatory innovation is unlikely to help the proper development of the financial industry.” Rep. Yoon also urged, “Two years ago, the FSC announced strong regulatory innovation emphasizing improved perception, but it is questionable whether regulatory reduction has been properly achieved,” and called for “more progressive regulatory innovation at the time of the ‘financial big bang,’ when boundaries between sectors are dissolving.”

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