According to a press release issued on May 6, 2021, the Financial Services Commission (the “FSC”) and the Financial Supervisory Service (the “FSS”) announced a reform to the rules on suspending their review of licensing applications or request for changes in major shareholder of a licensed financial institution (the “Suspension Rules”).  

Under the current Suspension Rules, regulators may suspend their review of a financial business license application or request for changes in major shareholder of a licensed financial institution (collectively, “Application”) if: (i) the applicant is subject to an ongoing criminal proceeding, inspection or investigation from the FSC, FSS, Korea Fair Trade Commission, National Tax Service or Prosecutors’ Office and (ii) the relevant issue subject to inspection or investigation is deemed to have a material impact upon the regulator’s review of the Application.  The following is a summary of the key reforms announced by the FSC and FSS with respect to the Suspension Rules.  

1.   Greater Clarity to Suspension Events

Until now, the Suspension Rules did not apply uniformly across all sectors within the financial industry.  This caused financial regulators to suspend the review process without any further consideration whenever a suspension event prescribed under any applicable finance-related statute occurred.  

To address this issue, financial regulators will be amending existing regulations and will be developing a new set of Suspension Rules beginning in June of this year.  The amendments and the new Suspension Rules will set forth clear principles for suspending the review of an Application (based on whether the issue is material, definitive, imminent and remediable) and detailed suspension events for each stage of the review process so that the Suspension Rules can be implemented with greater uniformity across all sectors within the financial industry. 

For example, regulators will no longer suspend their review of an Application merely because a criminal complaint has been filed by a private citizen.  The review process will be suspended only when compulsory measures (such as the issuance of a search warrant or an arrest warrant) are introduced or an indictment has been made, which indicates a greater possibility of wrongdoing by the applicant.  As for administrative proceedings, a regulatory investigation will not affect the regulator’s review of an Application unless there is a criminal complaint (filed by an administrative authority), regulatory investigation or a regulatory sanction procedure prior to the filing of the Application.  

2.   Periodic Review to Resume Suspended Applications 

Until now, the FSC had full discretion on when and how to resume the review of a suspended Application.  This approach has been criticized because the applicant was not able to predict when the review process would resume, and oftentimes the review process would be suspended indefinitely until all of the issues were finally resolved.

In response, the FSC plans on reviewing each suspended Application every six months to determine whether the regulators may resume their review of the Application.  The FSC will be establishing requirements and guidelines with respect to resuming their review.  

For example, the FSC indicated that they would resume their review of an Application in case (i) there is no indictment within one year after there has been any compulsory investigation, (ii) even if there is an indictment, the indictment is not due to any matter that would disqualify the Application under any finance-related law, (iii) both the district court and appellate court issue a conclusive court order in favor of the applicant, or (iv) with respect to administrative proceedings, there are no sanctions procedures initiated within six months after the date of inspection or the regulators conclude the inspection without imposing any sanctions.  

3.   Expanding Suspension Rules to the Entire Financial Industry

Previously, the Suspension Rules were pursuant to the laws that governed the applicant’s financial business.  Therefore, if the applicable law did not have any Suspension Rules (which is the case regarding the Insurance Business Act, the Financial Holding Company Act and the Specialized Credit Finance Business Act), then Applications submitted by financial service providers subject to those laws could not be suspended (unless the Application was for requesting a change in major shareholder pursuant to the Act on Corporate Governance of Financial Companies which has its own Suspension Rules).  

Going forward, the new Suspension Rules will apply across all sectors within the financial industry, and therefore the new Suspension Rules will also apply to Applications submitted by insurance companies, specialized credit finance service providers and financial holding companies.  

Implications

The financial regulators hope that the new Suspension Rules will support the development of the financial industry by (i) reducing uncertainties for applicants looking to enter the financial industry, and (ii) encouraging financial institutions to expand their operations into new business areas.  

With regard to next steps, the financial regulators plan to propose amendments to the laws and regulations applicable to each sector beginning in June of this year.  However, the overall timeline may vary from sector to sector depending on whether an amendment to the law or its enforcement decree is required, which typically requires a longer legislative process.  Given the potential impact of the reform to the Suspension Rules, it would be important to closely monitor its future development.