Recent implications by the government to relax the regulations on the separation of industrial and financial capital have sparked interest within the market as to how the regulations will change in the near future.
On July 19, 2022, the Financial Regulatory Innovation Committee (“the Committee”), a private organization arranged by the Financial Services Commission (the “FSC”), launched its first meeting. The Committee consists of a total of 17 experts representing the economy, finance, law, digital and media sectors and will be joined by the Chairman of the FSC, the Governor of the Financial Supervisory Service, and other persons from various financial associations and research institutes to pursue its initiative to bring innovation in financial regulations.
During its first meeting, the Committee introduced “Challenges and Prospects of the Regulations on the Separation of Industrial and Financial Capital” as the very first innovation initiative among the four sectors, nine tasks, and 35 detailed tasks as determined based on the requests by the financial industry. The Committee also discussed the necessity of revising the regulations on the separation of industrial and financial capital, especially those regulations that restrict financial companies’ investments in their subsidiaries and their scope of business, in light of the diversification and digitalization of the functions of financial companies.
1. Current Regulation on Separation of Industrial and Financial Capital
The separation of industrial and financial capital is a principle developed to restrict financial institutions (i.e., banks) from owning or controlling any non-financial enterprise (and vice versa) in order to prevent potential conflict of interests between customers of the financial institutions and industrial capital, concentration of economic power in a single entity, and potential harm to the financial soundness of financial institutions. This principle was adopted as a legal principal in Korea when the Banking Act was amended in 1982, prohibiting the ownership and de facto control of more than 8% of the voting shares of a bank by the same person (including specially related persons). Since then, many laws such as the Monopoly Regulation and Fair Trade Act (the “Fair Trade Act"), the Financial Holding Companies Act, the Insurance Business Act, and the Act on the Structural Improvement of the Financial Industry, have introduced and enforced regulations on the separation of industrial and financial capital.
The regulations on the separation of industrial and financial capital in Korea can be broadly classified into (i) prohibition of a non-financial enterprise’s ownership and control of a financial institution and (ii) prohibition of a financial institution’s ownership and control of a non-financial enterprise.
The following regulations, among others, prohibit a commercial enterprise’s ownership and control of a financial institution: (i) the Banking Act, which prohibits a non-financial institution (a commercial enterprise (a) whose aggregate capital of non-financial affiliates accounts for 25% or more of the total capital of the affiliates, or (b) the sum of non-financial affiliates’ total assets is KRW 2 trillion or more) from holding more than 4% of the voting shares of a bank (10% on the condition of not exercising voting rights) (Article 16-2 of the Banking Act), (ii) the Financial Holding Companies Act, which prohibits a non-financial institution from holding more than 4% of the voting shares of a bank holding company (15% for a local bank holding company) (Article 8-2 of the Financial Holding Companies Act), and (iii) the Fair Trade Act, which prohibits a general holding company from holding shares of a domestic company that engages in financial or insurance business (Article 18 (2) 5 of the Fair Trade Act).
As for the prohibition of a financial institution’s ownership and control of equity in a commercial enterprise, (i) banks or insurance companies may not own more than 15% of voting shares of non-financial companies (Article 37 (1) of the Banking Act and Article 109 of the Insurance Business Act), and (ii) financial holding companies may not own shares of companies other than companies operating financial or insurance businesses (Article 6-3 of the Financial Holding Companies Act and Article 18 (2) 4 of the Fair Trade Act).
2. Pros and Cons on Separation of Industrial and Financial Capital
There have been continuous debates over the deregulations on the separation of industrial and financial capital. In 2018, when Lotte Group was forced to sell its stake in a financial company following the Group’s restructuring into a non-financial holding company structure, there were discussions as to whether it was reasonable to require a non-financial holding company to not hold any stake in a financial company and whether such requirement can be deemed as discrimination towards non-financial holding companies. The Act on Special Cases Concerning the Establishment and Operation of Internet-only Banks that took effect in 2019 also spurred discussions, as it allowed non-financial institutions to hold up to 34% of the voting shares of an internet-only bank, much above the threshold set for commercial banks.
With the recent growth of digital finance, demands for relaxation of the regulations on the separation of industrial and financial capital have increased. If the regulations on the separation of industrial and financial capital are relaxed, financial institutions, including banks, will be able to provide more customized services to their consumers by utilizing their existing consumer data and business capabilities in non-financial areas. Non-financial companies, including Big Tech, are also hoping to enter the financial industry by utilizing their accumulated information and platforms.
Of course, many have objected to the relaxation of the regulations on the separation of industrial and financial capital in light of the original intent and purposes of such a separation.
At this time, the discussion on the separation of industrial and financial capital is focused mainly on relaxing the regulations that prohibit financial institutions from owning and controlling equity in commercial firms. The Committee also discussed (i) whether it is necessary to introduce a new standard of “efficiency” to allow financial companies to invest in non-financial subsidiaries and whether the current regulations on risk management are sufficient, (ii) whether it would be desirable to limit the scope of ancillary business of a financial company to that of the original business as currently conducted and (iii) whether a new standard focusing on efficiency should be introduced to permit businesses to conduct ancillary businesses and whether other systems or measures should be implemented to control risks that may arise from the ancillary business.
The changes in the regulations of the separation of industrial and financial capital will bring a substantial change to the overall industrial landscape as well as the financial industry and may have a significant impact on the ownership structure and businesses of large business groups in Korea, depending on how the discussions and institutional changes develop.
As it is clear that the government is seeking to ease the restriction on the separation of industrial and financial capital, relevant entities will closely monitor the development of future discussions, the government’s new policies, the drafting of various legislative bills, and future amendments.
