Foreign Financial Companies at Disadvantage
The so-called “firewall” regulations which prohibit financial institutions, such as banks and securities companies, from engaging in more than one business area are an obstacle that hampers the growth of South Korea as a financial hub in Northeast Asia, panelists asserted in a seminar held on Aug. 21.
They noted that while domestic financial firms are relatively free from the partitioning regulations as they are run under a financial holding company system, smaller foreign counterparts are subject to the regulations, which make it difficult for them to improve operational efficiency.
The “Reform of Firewall and Outsourcing Regulations” seminar was hosted by law firm Kim & Chang at the Korea Federation of Banks (KFB) building in Myeong-dong, Seoul.
Lee Won-joon, a guest speaker from Credit Agricole CIB’s Seoul branch, said, “Foreign financial companies that operated as a single entity in their own countries under a universal banking system have to divide their organization in several units in Korea to engage in different business areas because Korea adopts a specialized banking system.” Under the current circumstances, the firewall regulations which restrict information exchanges between financial companies specializing in different businesses is practically a disincentive for South Korea to jump into a financial hub in Northeast Asia, Lee said.
Unlike Europe which has chosen a universal banking system that allows banks and securities companies to operate as a single body, South Korea sticks to a specialized banking system that requires the separation of banks, securities companies and asset management companies. The Korean system is modeled after the systems in the United States and Japan. However, these countries have eased firewall regulations to minimize the limitations from such partitioning controls. In contrast, South Korea still has stricter-than-necessary legal barriers, making it impossible for foreign financial companies to share information with their affiliates. For instance, Deutsche Bank’s Korean unit cannot share information on its Korean clients with Deutsche Securities Korea.
Lee said, “South Korean financial firms actually share information with their affiliates by making use of the financial holding system. Financial authorities need to relax the firewall regulations and introduce a ‘country head system’ to ensure that foreign financial companies compete with Korean firms on an equal footing.”
With the boundaries between financial and information and communication technology (ICT) industries becoming blurred due to the advancements in fintech technology, partitioning regulations against the financial industry is anachronistic, experts said. Lee said, “Demand for complex financial services is growing and the boundaries among traditional financial areas are crumbling down because of fintech innovation. Changing the existing firewall regulations is not an option, it's a must.”