Since 2016, Korea’s fintech startup ecosystem has been thriving, now boasting more than 400 fintech companies across sectors such as electronic money transfer and payment, equity investment, peer-to-peer financing, insurtech, internet banking, crowdfunding and digital. asset management, to name a few.
Below is a brief introduction to the main Korean fintech laws and policies. These aim to support financial innovation and protect financial consumers, and ensure a level playing field, based on the regulators’ policy direction of “same function, same regulation”.
- Act on Electronic Financial Transactions (“EFTA”)
The most basic law that regulates electronic money transfer and payment and other forms of electronic financial transactions is EFTA. Korean simple payment platforms such as Sling, Kakao Pay and Naver Pay is anchored in this law. Issuance and administration of the electronic means of advance payment used for money transfer and payment gateway (“PG”) businesses (ie electronic payment businesses), and other designated forms of electronic financial transactions require registrations with the Financial Services Commission (“FSC”) under the EFTA.
EFTA was established in 2006 and entered into force in 2007. Discussions are now underway about general changes to this law in the National Assembly, mainly driven by the financial authority, FSC. The FSC is motivated by a need to keep up with the speed of digital transformation, and to take the necessary measures to protect consumers and regulate fintech companies, at the same level as the regulations applicable to established financial institutions, based on “same function, same regulation » policy direction The bill includes introducing the new ‘My Payment’ service similar to PISP under the EU’s PSD2, and provides explicit legal grounds for opening up banking services that were previously provided based on government policy.
- Act on special matters concerning the establishment and operation of online banks
This act was established in 2018 and entered into force in 2019. It lays down special provisions that apply to online banks, in addition to those that follow from the Banking Act, for example easing the requirements for minimum capital amounts. It also relaxes the shareholding limits of non-financial investors, as defined therein, while strengthening certain restrictions on the extension of credit for the same borrowers or major shareholders.
- Act on online investment-related financial activities and protection of users
This so-called “Peer-to-Peer Lending Act”, established in 2019 and which comes into force in 2020, provides an explicit legal basis for the regulation of online peer-to-peer lending businesses. Previously, there were no separate legal grounds for online peer-to-peer lending businesses, and only administrative guidelines existed, raising concerns about possible regulatory blind spots. The Act lays down conditions that are necessary for the registration and supervision of online peer-to-peer lending businesses and the protection of users, with the aim of promoting the businesses in a sound manner and contributing to the development of financial innovation and the national economy.
- Act on the use and protection of credit information
This act basically aims to protect credit information, while at the same time promoting the efficient use and systemic management of credit information. Through an amendment to this law, the new MyData system was introduced in August 2020. MyData is a business that allows a licensed entity to collect an individual’s credit information from other financial institutions and other relevant companies, and transfer such information to other MyData and the like. companies at the individual’s request. It is expected that if this MyData business is combined with the MyPayment business to be introduced in EFTA to be changed and the open banking service, it will provide the basis for a powerful financial platform where a comprehensive digital wealth management service for individuals can be provided.
- Special Act on support for financial innovation
This law was established in 2018 and entered into force in 2019. It provides a legal basis for the financial regulatory sandbox, which aims to support the growth of the fintech industry and improve regulation through innovation, to prevent delays in the launch of new products and services. In doing so, it aims to balance the pursuit of public values, such as promoting diverse industrial growth while protecting people’s lives, safety and the environment.
Under the financial regulatory sandbox, companies can apply for the designation of an innovative financial service for their offering, and once designated as such, the service can benefit from an exceptional exemption from the relevant regulatory requirements for two years, with a further two-year extension as well possible. Businesses can achieve this designation by meeting the assessment criteria, which include service innovativeness, benefits to consumers, unavoidable regulatory exemption, and customer protection and risk management measures. The service provider can also request the authorities to improve the relevant regulations before the end of the designation period, and the period for this can be up to 1.5 years.
In addition, there is a rapid “Check on Regulations” system, which allows financial service providers facing regulatory uncertainties to quickly check the applicability of relevant laws and regulations to their services.
In addition, the FSC may appoint an agent capable of handling a financial company’s affairs upon transfer from the financial company for the purpose of implementing a pilot program for innovative financial services. Fintech companies can be such a designated agent.
- Financial Consumer Protection Act
This law was recently passed in 2020, and came into effect in 2021. It consolidated the obligations that financial institutions must follow during their product sales process, which were previously regulated by sector under each respective financial law. This law has had a huge impact on fintech companies, as the financial authorities issued guidelines on how to distinguish advertising activities, which do not need a regulatory license, from brokerage services that require a regulatory license on financial platforms.
- Act on reporting and use of specified information on financial transactions
This Act is Korea’s Anti-Money Laundering Act, and in 2020 it was amended to include virtual assets and VASPs (Virtual Asset Service Providers), detailing their reporting obligations to the FSC, as well as their AML obligations, in line with the guidelines of the Financial Action Task Force. From 5 October 2022, there are 36 VASPs that have been reported to the FSC.
- Guidelines for financial companies’ investment in Fintech
At the policy level, Korea also has guidelines for financial companies’ investment in Fintech. These guidelines allow financial institutions to request that the financial authorities speed up the review and approval process for their investment in fintech companies.
- Guidelines for artificial intelligence in the financial sector
There are also guidelines for artificial intelligence in the financial sector, which were announced by the FSC in July 2021. The guidelines adopted core values which are: (i) responsibility in the financial sector; (ii) accuracy and security of AI training data; (iii) transparency and fairness of AI financial services; and (iv) protecting the rights of financial consumers. FSC also plans to create a “Data Library” to provide access to AI development data, and an “AI Test Bed” to support the security verification of AI services.
- Guidelines for securities businesses that handle fractional investments
These were recently announced in relation to the first case in Korea where certain sub-investment instruments were regarded as securities, or more precisely, investment contract values under Korean Capital Markets Law. They provide criteria for determining whether certain fractional investment instruments qualify as securities, as well as the necessary considerations when applying for a financial regulatory sandbox.
- (Provisionally Named) Digital Asset Framework Act
Finally, in Korea, there is an ongoing discussion among the financial authorities as well as academia and members of the National Assembly on how to regulate digital tokens. The current administration announced that it would bring in the Digital Asset Framework Act to regulate the digital tokens and digital assets, and the FSC also previously announced that it would create guidelines to regulate digital assets that qualify as securities. It is expected that the Capital Markets Act and the guidelines may apply to the digital assets that qualify as securities, while other digital assets will be regulated by the Digital Asset Framework Act.
The above list is not exhaustive, as Korea has many financial laws, and the financial institutions that intend to expand into fintech business areas will still be subject to the existing financial laws. In particular, the Korean regulators are currently considering expanding the scope of businesses that the incumbent financial institutions can engage in by amending existing financial laws, as Korean financial laws are based on a positive regulatory system where Korean financial institutions can generally only conduct regulator-approved businesses.
