Fintech Regulation

Unlike traditional finance, fintech services evolve rapidly on the basis of technological innovation, but the related legal framework tends to change relatively gradually.

As a result, when a new service appears, there are many cases in which the interpretation of which financial business the service falls under, or whether it is subject to licensing, is made after the fact.

In particular, services with complex functions, such as payment settlement, investment platforms, and the distribution of unlisted shares and fractional investment, are not governed by a single law, and whether the business is lawful may differ depending on the scope of regulatory interpretation.

This regulatory environment operates as a structural factor that reduces the predictability of fintech regulation as a whole.

In the fintech field, regulation is not merely a limiting factor but functions as a standard that determines the form of the business model.

Even with the same technology or service, there are cases in which it must be operated under an entirely different structure depending on how regulation is applied.

A fintech business model is directly affected by the following factors.

In particular, for ventures and startups, the outcome of regulatory application is directly connected to attracting investment, business expansion, and entry into the institutional framework, so legal review needs to precede from the early stage.

Current financial regulation is structured, in principle, to permit financial services only on the premise of licensing or registration.

As a result, a new fintech service that is not clearly defined under existing statutes may be restricted from even launching its business, despite the fact that its legality has not yet been determined.

This prior-approval approach has the limitation of failing to adequately reflect the pace at which technology and services develop.

In the fintech industry, market validation and improvement are important, yet the recurring structure has been one in which business experimentation itself becomes difficult unless a regulatory interpretation comes first.

Ultimately, regulation centered on prior approval can result in blocking the potential for innovation in advance, and this becomes a factor that constrains the entry and growth of ventures and startups.

Payment and investment platforms are the areas in which regulatory conflicts arise most frequently within the fintech industry.

Because these services are directly involved in the transfer of funds and in investment decisions, they become a core target of financial business regulation.

Depending on the platform structure, different regulatory frameworks, such as the electronic financial business, investment brokerage business, and quasi-financial business, may need to be considered at the same time.

In particular, in areas where institutionalization has recently progressed, such as the trading of unlisted shares or fractional investment, additional regulation of the investment structure and scope of business may apply even after the service is brought within the regulatory system.

As a result, a startup may find itself in a position where it must adjust its business model in line with regulatory interpretation and institutional change, separate from the technical maturity of its product.

For this reason, when operating or preparing a payment or investment platform, it is important to carefully review the scope of regulatory application and the business structure from the stage before the service is launched.

The innovative financial services program focuses not only on the technical innovativeness of a fintech service, but also on how to set the relationship between that service and the existing financial regulatory framework.

Rather than leaving the service entirely outside the scope of regulation, the financial authorities evaluate it on the premise of identifying which laws and supervisory framework can be used to manage it.

In this process, designation as an innovative financial service is closer to a method of temporarily separating and managing an area that cannot be captured by the existing regulatory framework, rather than a decision that acknowledges a regulatory gap.

Accordingly, an innovative financial service functions not as a declaration that regulation will not be applied to a new financial activity, but as an intermediate stage for exploring and establishing the scope of regulation that can be applied.

When the demonstration period of the regulatory sandbox ends, the fintech service is reviewed with a view to being brought within the regulatory framework of the financial system.

In this process, the central regulatory issue lies in whether to classify the service as an existing financial business or to manage it under a separate regulatory framework based on information and communications technology.

In particular, in areas such as payment, investment brokerage, and the trading of unlisted shares and fractional investments, the applicability of existing financial regulation is continually discussed, given that these involve the transfer, management, and investment judgment of funds.

After institutionalization, existing financial business regulatory elements, such as licensing and registration requirements, capital regulation, and internal control obligations, may be applied in stages, and this can lead to a substantial expansion of the intensity and scope of regulation.

In the end, the regulatory sandbox can be assessed not as a section in which fintech regulation is temporarily eased, but as the very process in which regulatory standards for new financial services are formed.

An application for innovative financial services may be filed by a company under the Commercial Act with a place of business in Korea or by a financial company. Applications may be submitted only during the receipt period for each round, and once a designation application is received, review is generally conducted within 30 days.

However, where supplementation requests or additional review are necessary, the review period may be extended up to 120 days.

The basic operating period for a designated innovative financial service is within two years, and it may be extended once for up to a further two years.

If regulatory improvement remains necessary thereafter, the operating period may be additionally extended within a range of up to one year and six months.

▶ Application Requirements for Innovative Financial Services

▶ Operating Procedures for Innovative Financial Services

Until now, the rules related to promoting venture investment have, in principle, restricted investment in financial companies, and as a result, many fintech companies were in a structure where they faced limits on attracting investment after being brought within the regulatory system, even if they were designated as innovative financial services.

Recently, however, regulatory adjustments aimed at supplementing these limitations have been carried out in stages.

As a representative example, with the institutionalization of trading platforms for unlisted shares and fractional investments, a revision of the notification was pursued in a direction that includes the operators of such platforms among the entities eligible for venture investment.

This carries significance in the following respects.

In other words, although the regulatory environment remains strict, it can be seen that the room to newly design the very possibility of investment, depending on the business structure and legal nature, is gradually expanding.

Rather than relying on after-the-fact interpretation, regulatory response calls for a method of designing the legal structure proactively from the stage of business planning and attracting investment.

In particular, specialized legal review is important at the following points.

1. Determination of operator status

2. Design of the investment structure

3. Monitoring of regulatory changes and proactive response

In the end, fintech regulatory response is a strategic legal issue that connects through to investment feasibility, the growth path, and the exit strategy.

The earlier the business stage, the more there is a need to interpret regulation not as a fixed limit, but as a variable to be managed and utilized within the business structure.