FSC defers plans to ease separation rules btw financial and non-financial firms

[Courtesy of FSC]

South Korea’s Financial Services Commission (FSC) has postponed the release of a plan aimed at easing the rule on the separation of financial and industrial capital, allowing financial entities to diversify into non-financial domains. The decision stems from the FSC’s assessment that, in a scenario where the real economy’s recovery is slower than anticipated, additional time is essential for comprehensively evaluating the implications of the rule change.

According to sources from the FSC on Thursday, the regulatory body has opted for an extended process involving soliciting opinions on relaxing the demarcation between financial and non-financial spheres. Initially slated for the end of the current month, the announcement of this relaxation has been postponed.

“In the course of inter-ministerial discussions, the notion of providing thorough preliminary explanations to non-financial sector entities, such as small and medium-sized enterprises, and collecting their perspectives was proposed. Therefore, we have chosen to delay the announcement,” said an FSC official. “We will further explore ways for the harmonious coexistence of financial and non-financial realms.”

The FSC has examined the imperative of allowing financial institutions to venture into non-financial sectors, all within the context of the evolving landscape that blurs the boundaries between financial and non-financial enterprises. The financial regulator was slated to announce specific measures at a financial regulatory reform meeting at the end of this month.

The relaxation of the decades-long regulatory separation of financial and industrial capital by the financial authority has been one of the most anticipated policies for the second half of the year.

Previously, the FSC mentioned that it is discussing not only supplementing the current positive (enumerated) approach to the scope of non-financial businesses that financial companies can engage in, but also switching to a negative (inclusive) approach and allowing all but “off-limits” industries.

However, during the last-minute inter-ministerial coordination process, concerns were raised that if banks armed with substantial financial resources and business experience expand into various industries, it might adversely affect small and medium-sized enterprises and small businesses that are already struggling. As a result, the announcement was indefinitely postponed.

There were also reportedly calls for financial companies to strengthen their risk management and control systems before entering the non-financial business.

The recent spate of large-scale financial accidents at KB Kookmin Bank, Kyongnam Bank, and DGB Daegu Bank, is believed to have prompted the growing calls for strengthened risk management in the financial sector.

However, the FSC clarifies that the discussion on financial companies’ entry into non-finance sectors itself has not been completely halted.

“After listening to the opinions of non-financial businesses and reviewing the bank risk management system, we will decide on the timing of the announcement again,” said an FSC official, stressing that the current development does not mean that the discussion itself has ceased.

The FSC plans to try “financial and non-financial convergence” in areas where there is no unfair competition controversy between financial companies and small and medium-sized businesses.

In this regard, the FSC is discussing allowing the state-run Industrial Bank of Korea (IBK) to operate a used machinery trading platform through innovative financial services. Plans to link such a platform with services such as loans are also under consideration.

The idea is to refine the plan to allow non-financial businesses of financial companies while promoting businesses where the bank’s financial and information resources can help small businesses.