On April 29, 2020, the National Assembly passed amendments to the Financial Investment Services and Capital Markets Act (the “Amended FSCMA”) that will bring significant changes to financial investment service providers on (i) the requirements for information barrier (sometimes informally referred to as “Chinese walls”), (ii) the outsourcing of business functions and (iii) the engagement in concurrent or ancillary businesses.  The Amended FSCMA, which will take effect one year after the date of promulgation, will enable financial investment service providers to self-regulate such matters and the regulators to focus on monitoring such self-regulations.  We summarize below several key features of the Amended FSCMA.   
 

• Information Barrier Requirements 

The information barrier regulations under the FSCMA prior to the recent amendment have been criticized for enumerating specific types of business activities that must be separated by an information barrier (e.g., separation between corporate banking and proprietary trading/financial investment services (such as securities dealing and brokerage)).  This rigid regulatory approach is viewed to have failed to keep abreast with today’s changing dynamics within the financial investment service industry.   

Instead, the Amended FSCMA (i) abolishes various requirements for establishing information barriers, such as requiring physical separation of office spaces and restricting directors and officers from holding concurrent positions across different financial investment services (such as investment dealing/brokerage, trust business, collective investment business, etc.), (ii) instead of the current prescriptive requirements, identifies the general principles for establishing information barriers within a financial investment service provider or with respect to third parties (including affiliates), and (iii) requires individual financial investment service providers to establish their own internal controls standards on information barriers (and exceptions thereto) and employee training. 

In addition, the Amended FSCMA intends to regulate the flow of information based on the nature of information that must be protected (such as material non-public information or information related to the management of a client’s assets) rather than based on the types of business activities performed by financial investment service providers.  Where misuse of protected information in violation of internal control standards is identified, the Amended FSCMA imposes aggravated penalties (up to 150% of the unlawful gain) to prevent recurrence.  
 

• Outsourcing and Engagement in Concurrent or Ancillary Businesses by Financial Investment Service Providers  

The FSCMA categorizes work directly related to a financial investment service provider’s licensed activities into “core functions” and “non-core functions.”  Under the current regulations, “core functions” are not permitted to be outsourced, while “non-core functions” may be outsourced only to licensed third party vendors.  Under the Amended FSCMA, financial investment service providers may outsource “core functions” (other than internal control operations such as compliance, internal audit and credit risk analysis) to licensed third party vendors, who in turn may sub-contract the outsourced work upon obtaining the financial investment service provider’s consent.  However, financial investment service providers remain responsible for all sub-contracted activities to ensure that investor information is properly managed. 

As for concurrent or ancillary businesses, financial investment service providers will be permitted to file a report regarding their concurrent or ancillary businesses to the Financial Services Commission subsequent to engaging in such business rather than filing the report prior to such engagement as currently required.  
 

• Key Takeaways 

The existing information barrier requirements, introduced in 2009 when the FSCMA was first enacted, were aimed to protect investor information and prevent conflicts of interest within a financial investment service provider by restricting its directors and officers from holding concurrent positions and requiring physical separation of office spaces.  Since the enactment, however, the financial industry has been calling for reform as the existing requirements failed to recognize the different sizes and businesses of various financial investment service providers and was no longer suitable for the current environment where financial investment service providers are increasingly diversifying their businesses, collaborating with other financial investment service providers and developing new products utilizing artificial intelligence and big data.   

With the liberalization on subcontracting of outsourced work and introduction of a principle-based approach for information barrier requirements under the Amended FSCMA, financial investment service providers are expected to become increasingly flexible and efficient in their management of personnel, which will in turn facilitate their business development.  Foreign financial institutions, in particular, will be able to expand the deployment of their personnel, systems and services located or provided from overseas in support of their operations in Korea.  Concurrently, however, this more principle-based, self-regulatory approach will likely increase the burden for financial investment service providers of establishing and maintaining internal controls. 

Now that the FSCMA has been amended, we expect its subordinate regulations to be amended to further implement the changes envisioned in the Amended FSCMA.  Financial investment service providers will therefore need to continue monitoring the legislative developments arising out of the Amended FSCMA.