[Square] Innovation Without Regulation, Regulation Without Innovation

"Achieving a Balance Between Innovation and Regulation Is Crucial for the Stable Development of the Financial Industry"

Deputy Governor Lee Jin-seok, Financial Supervisory Service

[Asia Economy] Big tech companies are rapidly entering the financial industry. Thanks to this, the financial sector is also receiving a generous dose of innovation. However, since the rules of the game for financial platform services provided by big tech have not yet been established, conflicts between financial companies and big tech are deepening. Achieving a balance between innovation and regulation is crucial for the stable development of the financial industry.

Financial platform services provided by big tech have several characteristics. First, they have a monopolistic nature. Platforms rely on network effects, and network effects are based on strong market dominance. Google, Facebook, and Amazon are examples. Second, as financial platform services become more active, the risk of spillover between financial and non-financial sectors increases. Since big tech operates both non-financial and financial businesses, problems in the non-financial sector can affect the financial sector.

Third, the weakening of financial intermediation functions. Financial platform services provided by big tech are monopolistic. In a monopoly market, monopoly profits occur. If big tech earns relatively high profits, the profitability of financial companies decreases. As a result, the financial intermediation function of financial companies may lose vitality. Lastly, big tech providing financial platform services can exert significant influence on financial consumers by aggregating commercial and financial transaction information. Nevertheless, regulation is insufficient. For example, even when big tech, which has several times the influence of small financial companies, provides financial platform services, there is no obligation to have transparent governance and a thorough internal control system.

Let us look at international trends related to big tech regulation.

The Basel Committee published a report on big tech regulation in March 2021. It diagnosed that the current regulatory framework is insufficient to regulate the potential risks of big tech and emphasized a ‘holistic’ approach. It also stated that big tech regulation is not sufficient with activity-based supervision alone and that entity-based supervision is necessary. This marked a departure from the previous stance advocating activity-based supervision based on the principle of same activity, same regulation, emphasizing the need for comprehensive supervision of big tech.

Recently, Japan has prepared regulatory measures for big tech entering the financial industry. In June 2020, it amended the previous ‘Act on Sales, etc. of Financial Products’ to the ‘Act on Provision of Financial Services.’ By expanding the concept from financial product sales to financial service provision, it absorbed big tech’s financial platform service activities into the framework of financial regulation.

However, products requiring highly specialized explanations cannot be handled on financial platforms.

The main regulations on financial platform services are as follows. Financial service intermediaries have a duty of care as fiduciaries toward customers, must disclose fees received from financial companies upon customer request, and are liable for damages caused by negligence during the financial service intermediation process. They must also establish an appropriate internal control system to provide financial platform services.

So far, South Korea has mainly tried to establish a regulatory framework for big tech’s financial platform services through the Electronic Financial Transactions Act. As a result, there have been many discussions and achievements in the context of same activity, same regulation. Going forward, it is necessary to expand discussions on approaches that can comprehensively regulate big tech providing financial platform services, like Japan. Innovation and regulation must be balanced. Regulation without innovation is hollow, and innovation without regulation is difficult to sustain stably.

Lee Jin-seok, Deputy Director, Financial Supervisory Service

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