An amendment to the Financial Investment Services and Capital Markets Act, which has been controversial due to excessive regulation for the financial investment sector, will take effect on May 20, 2021 (the “Amendment”).  This Amendment will bring significant changes to financial investment service providers on (i) the requirements for information barriers (sometimes informally referred to as “Chinese walls”), (ii) the outsourcing of business functions and (iii) the engagement in concurrent or ancillary businesses. 

The Amendment has eased regulations on these three areas in order to enable financial investment service providers to self-regulate such matters (based on a more “principle-based, self-regulatory approach”) and the regulators to focus on monitoring compliance with such self-regulations.

We summarize the key points of the Amendment as follows:
 

• Relaxation of Information Barrier (Chinese Wall) Requirements

Regarding the current FSCMA’s stipulation of the scope and types of business activities that are subject to the information barrier regulations, the financial investment sector has requested an amendment to the FSCMA, stating that this rigid regulatory approach has failed to keep abreast of today’s changing dynamics within the financial investment service industry.  Accordingly, the Amendment only stipulates the basic principle of information barriers (i.e., principle-based approach) and allows financial service providers to voluntarily implement other detailed requirements through their internal control standards (i.e., self-regulatory approach).

In addition, the Amendment is aimed at regulating 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 Amendment imposes aggravated penalties (up to 150% of the unlawful gain) to prevent recurrence.  As such, stricter sanctions will be imposed on violations of self-regulatory requirements.
 

• Relaxation of Requirements for the 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 and registered third party vendors.  With the Amendment, financial investment service providers may outsource “core functions” 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 the sub-contracted activities are 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.
 

With the liberalization on subcontracting of outsourced work and introduction of a principle-based approach for information barrier requirements under the Amendment, financial investment service providers are expected to become increasingly flexible and efficient in their business operation.  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.