On October 28, 2021, Mr. Seung-Beom Koh, Chairman of the Financial Services Commission (the “FSC”) held a meeting with the banking industry, including the heads of commercial banks and representatives from industry associations, other regulatory bodies and research institutions.
In this meeting, Chairman Koh mentioned that due to the rapidly changing business environment surrounding the banking industry, such as digital transformation of the economy and industry as a whole, the growth of virtual financial transactions as a consequence of the COVID-19 pandemic, and “big tech” companies entering the financial industry, the FSC will provide various support/benefits to strengthen the core competencies of banks. Among those mentioned, the following may have a significant impact on the banks’ business going forward.
1. Key Remarks by Chairman Koh
First, Chairman Koh noted that the FSC will actively support banks’ digital transformation. Specifically, the FSC plans to (i) develop a policy framework for “digital universal banks” that can provide a multitude of services, including banking, insurance and investment through a single “super app,” (ii) consider reforming the rigid network separation rules and promoting the sharing of financial and non-financial information and (iii) support banks’ investment in new digital business opportunities.
Second, Chairman Koh indicated that the FSC will allow a broader scope of concurrent businesses and ancillary businesses for banks. Specifically, he stated that the FSC will consider reforming the regulatory framework for trust businesses and expanding the scope of investment advisory services, which had been limited to the real estate sector, to enable banks to advise their customers as a “general wealth manager.” Further, regarding platform businesses that are currently limited to banks for the provision of innovative financial services, the FSC will examine past performances and changes in the business environment to consider expanding the permissible scope of ancillary businesses so that banks can engage in a broader scope of platform businesses.
Last, Chairman Koh stressed that financial innovation should be based on fair competition, and that the government will continue to make efforts to create a level playing field.
2. Impact on Banking Business
If the above ideas were to be actually implemented, the banking industry will likely experience a significant change in the way banks conduct their business:
Most significantly, banks will likely be able to recommend or provide a wider range of financial products to their customers. Under the current regulatory regime, banks may only recommend a limited scope of financial products to their customers, even if they find other products to be more suitable. However, if the FSC reforms the applicable regulations so that banks may use a “super app” to provide a variety of services and products, and also expand the scope of investment advisory services beyond the real estate sector, then that will give banks greater freedom in marketing a wider range of financial products to their customers.
As an example, let’s say a bank customer wishes to do an online purchase of a product provided by a securities company. Under the current regulatory regime, the customer must install the app of the securities company, register as a customer, and purchase the product. According to Chairman Koh’s remarks, banks that are licensed to engage in credit information management business (so-called “MyData”) will be able to provide a one-stop service by comprehensively analyzing the customers’ financial product transactions, credit information, assets, etc., and then recommend financial products (deposit/loan/investment/guaranteed products, etc.) most suitable to that customer, and the customers can purchase the recommended products directly from the bank’s super app.
Under the current regulations, financial institutions are required to physically separate their information processing system from the external communications network that is connected to the server (referred to as “physical network separation”). There are only a handful of exceptions to such network separation requirement. While physical network separation has its own advantages of reducing potential virus attacks and hacking, it has also received criticism because of the substantial cost associated with setting up the equipment and safeguarding the system, and the efficiency issues resulting from separating data from inception.
It remains to be seen how and to what extent the rigid “physical network separation” requirement would be reformed. However, if the employees of a bank can access their internal network by using external networks to manage, repair and develop the bank’s internal network, it would be particularly helpful under extreme and unpredictable circumstances such as the COVID-19 pandemic where employees must work from home.
The issue of lifting the physical network separation requirement will likely have a significant impact not only on the banking industry, but also on the entire financial industry and other industries as a whole.
Other topics mentioned by Chairman Koh in the meeting, such as promoting the sharing of financial and non-financial information, expanding banks' concurrent and ancillary businesses, and reforming the regulatory regime for the trust business, are topics that have been actively discussed throughout the banking sector.
However, there has yet to be a concrete plan to implement those ideas, and there seems to be divergent interests among market participants. Most importantly, the relevant financial laws and regulations may need to be amended in order to implement such policies. As such, there appears to be several obstacles that need to be resolved before the above “banking business development blueprint” turns into reality. It is therefore important to closely monitor future discussions between the financial regulators and market participants, and the enactment/amendment of relevant laws and regulations.