Research Report
A Study on Legislating a Combined Regulatory Sandbox Law
Ⅰ. Backgrounds and Purposes
▶ Market intervention by the previous governments was regarded as a justifiable cause for regulation, which hinders industrial competitiveness at this point
○ Since the 1960s, the government has actively intervened in the market with the government-led economic development policies, replacing incomplete market functions, and directly intervened in the allocation of resources
○ However, the size of Korean economy increased rapidly through the 1980s and the 1990s and as the imbalanced economic growth by region has continued. It became virtually impossible for the government to interfere or intervene in the market in every details.
○ Therefore, the government’s regulations which have been accepted and considered justifiable now started hindering the competitiveness of the major industries.
▶ The government pursues regulatory reform with committees as main leading bodies to improve the domestic regulatory administration law
○ In 1992, the Korean government promoted full-fledged regulatory reform which was led mainly by the Economic Administration Deregulation Committee and the Administrative Reform Committee.
○ With the inauguration of the People’s Government in 1998, the Framework Act on Administrative Regulations was enacted under which the President’s ‘Regulatory Reform Committee’ was established as a pivotal agency. The Committee has prioritized and led the urgent and important regulatory reform tasks.
○ In particular, under the catch phrase of ‘regulatory innovation equals to growth’, new regulatory innovation organization and system were established including ‘Regulatory Innovation Strategy Meeting’ led by a president, a private-public-and academia combined ‘Regulatory Innovation Team’, and ‘Regulatory Adjudication System’ led by the private sector in order to address such regulatory issues as complex regulations which have been hard to address through the previous four governments.
▶ To establish new industries, new technologies, and new markets, the government-led ‘positive regulatory system’ has changed to ‘negative regulatory system’ and introduced regulatory sandbox.
○ The uniform and rigid regulations centered on heavy and chemical industries such as shipbuilding, steel, machinery, petrochemicals, and automobiles has caused difficulties in promptly commercializing new industries and technologies including artificial intelligence (AI), big data (Big Data), robots, mobility, bio-healthcare, drones, and UAM.
○ In addition, as we can see from the examples of Tada Taxi and Rotok, the strong entry regulations and conflicts between existing and new industries continue to arise. It can dismiss opportunities of creating new growth engine by developing and growing new industries and new technologies.
○ In September 2017, the government introduced ‘Regulatory Sandbox’ which allows the transition from ‘positive regulatory system’ which is ‘Prior Regulation – Ex-Post Permits’ to ‘negative regulatory system’ which is ‘Prior Permits – Ex-Post Regulation’. This was a way to maximize regulatory innovation performance in order to realize the national task of ‘regulatory redesigning for people’s livelihood and innovation’ as part of the direction of the new government’s regulatory reform.
○ Therefore, the government introduced the regulatory sandbox in four areas: ICT convergence and industrial convergence in January 2019, innovative finance and Regulation-Free Special Zone in April 2019. It was followed by additional two areas of Smart City in February 2020 and Special R&D Zone in December 2020. The system is about to be implemented in the Act on Support for Mobility Innovation and Revitalization scheduled to take effect on October 19, and the Act on Promotion of Transformation of the Circular Economy and Society scheduled to take effect on January 1, 2024.
▶ Analyzed any problems of the Regulatory Sandbox under the Korean laws on Regulatory Sandbox (Framework Act on Administrative Regulation, Special Act on Promotion of Information And Communications Technology and Vitalization of Convergence Thereof, Industrial Convergence Promotion Act, Act on Special Cases Concerning The Regulation of Regulation-free Special Zones and Special Economic Zones for Specialized Regional Development, Act on The Promotion of Smart City Development and Industry, Special Act on Promotion of Special Research and Development Zones, Mobility Innovation Act (scheduled to be effective), Act to Promote the Transition into Circular Economy Society (scheduled to be effective).
○ The current Administrative Regulatory laws provide provisions for ‘rapid identification of regulation’, ‘provisional permission’, and ‘special cases for demonstration.’ Laws other than Special Act on Support For Financial Innovation provides the duty of the government to revise relevant laws after the measurements of special cases for regulation.
○ Companies in the new industries or with new technologies are exempted from the existing regulations for four years (2+2) according to the laws of Regulatory Sandbox, but it is unclear whether existing regulations should be applied to companies which were selected after four years or whether they should stay under the Regulatory Sandbox.
○ The Korean regulatory sandbox is operated by five Ministries, namely Science and ICT (ICT Convergence, R&D Special Zone), Ministry of Trade, Industry and Energy (Industrial Convergence), Ministry of SMEs and Startups (Innovation Finance), and Ministry of Land, Infrastructure and Transport (Smart City/New Mobility Service). A public-private jointly corporate Deliberation Committee on Special Cases with Ministers of the five Ministries as chairperson is composed and being placed.
○ On the other hand, the Regulation-free Special Zones has the Deliberation Committee on Special Cases where the Minister of SMEs and Startups presides over and also has the Deliberation Committee on Regulation-Free Special Zones which is the higher-ranked committee with the Prime Minister as Chairperson. Thus, the composition of equal and similar committees composition and disagreement between committees may hinder the process. It leads to the need for a higher-ranked committee under the Presidential Office or Prime Minister’s Office for Regulatory Sandbox.
○ In addition, there has no substantial difference between the provisions on ‘examination special’ and ‘provisional permission’ in terms of purpose, requirements, methods and effect. Thus, it needs to be integrated and operated as a single regulation for special cases.
○ Misunderstanding or confusion in regulations are likely to occur as six different Ministries run the regulatory sandbox separately and a company may be confused about which ministry would be proper for them to apply.
○ In addition, the uncertainties in regulatory reform are increasing as more additional conditions than necessary in the process of operating the regulatory sandbox are attached.
▶ The regulatory sandbox is fragmented and spread across a number of different laws over six Ministries (Special Act on the Promotion of Information and Communication Promotion and Convergence Act (January 17, 2019), the Special Act on Industrial Convergence Promotion Act (January 17, 2019), and the Special Act on Financial Innovation Support (April 27, 2019), The Act on Special Regulations on Regulation-Free Special Zones and Special Economic Zones for Special Regional Development (April 17, 2019), the Act on the Creation of Smart Cities and Industrial Promotion, etc. (February 27, 2020), the Special Act on the Promotion of Special R&D Zones (December 10, 2020), the Mobility Innovation and Revitalization Support Act (scheduled to take effect on October 19, 2023), and the Circular Economic and Social Transformation Promotion Act (scheduled to take effect on January 1, 2024)). Thus, this paper aims to research on the enactment of an integrated law (proposal) of the regulatory sandbox in order to transform regulatory sandbox that is fragmented and spread across a number of different laws so that it can be turn into a system with integrity, unity, effectiveness, and rationality and eventually contribute to the new sustainable national growth strategy.
Ⅱ. Main Contents
▶ Definition of Regulation, its need and type under the regulatory administrative laws
○ Regulation is defined as the act of intervening (such as contract law, business regulation, entry regulation, price control, quality control, industrial regulation, environmental regulation, safety regulation, technology regulation, etc.) by an administrative entity into business and commercial activities of a private person for accomplishing a public administrative purpose.
○ The need for regulation arises when the gap between the haves and the have-nots deepens, unfair competition and disparity in power and information between large corporations and SMEs, and mom and pop business gets bigger, and the public interest including protection of the public health, safety, environment and consumer rights need to be attended.
○ Even if regulation is necessary, however, it would be a violation of ‘the Principle of Proportion’ under the Constitution when the disadvantages such as infringement of the autonomy of a private person or limitation of rights and benefits of the regulated party are grater than benefits coming from regulation.
○ Thus, the government should take measures to mitigate the disadvantages of regulation (e.g., transitional provisions) in order to avoid violating the principle of proportionality.
○ The types of regulations are economic regulations and social regulations, prior regulations and ex-post regulations, governmental regulations and self-regulation.
○ The modern society sees the emerge of various new industries, new technologies, and new industry with convergent technologies. The previous regulation, positive regulatory system now shows a limit in creating new growth engine. Thus, it needs to introduce a type of regulation that embraces new industries and new technologies.
▶ Analysis on the key contents of Regulatory Sandbox under the regulatory administrative laws
○ The main contents of the regulatory sandbox under the Regulatory Administration Act
- Regulatory sandbox under the Framework Act on Administrative Regulations
- Regulatory sandbox under the Special Act on Promotion of Information and Communication and Promotion of Convergence, etc
- Regulatory sandbox under the Industrial Convergence Promotion Act
- Regulatory sandbox under the Special Act on Financial Innovation Support
- Regulatory sandbox under the Act on Special Cases Concerning The Regulation of Regulation-free Special Zones and Special Economic Zones for Specialized Regional Development
- Regulatory sandbox under the Act on The Promotion of Smart City Development and Industry
- Regulatory sandbox under the Special Act on the Promotion of Special R&D Zones
- Regulatory sandbox under the Act on Support for Mobility Innovation and Revitalization Support Act
- Regulatory sandbox under the Act on the Promotion of Transformation of the Circular Economy and Society
○ Issues of the Regulatory Sandbox under the regulatory administrative laws
- Different and multiple laws and departments operating the regulatory sandbox cause the lack of common criteria for review and cooperative measures
- Issues of similarity in the regulatory system, such as requirements, examination procedures, examination standards, and follow-up management of special cases for regulatory demonstration and provisional permission
- Overlaps of bills on regulatory sandbox by different competent ministries
- Redundancy of government members and civilian members of a Special Deliberation (Examination) Committee per individual fields
▶ Case Study on the Regulatory Sandbox
○ Background of the Analysis of Regulatory Sandbox
- Based on the legal grounds under the Special Act on the Promotion of Information and Communication and the Promotion of Convergence, the Industrial Convergence Promotion Act, the Special Act on Financial Innovation Support, The Act on Special Regulatory Cases concerning Special Regulatory Zone and Specialized Regional Development Zone, the Act on the Creation of Smart Cities and the Promotion of Industries, etc., and Special Act on the Promotion of Special R&D Zones, and based on the analysis of the special cases for demonstration and of provisional permission from the Ministry of Science and ICT (ICT Convergence, R&D), Ministry of Trade, Industry and Energy (Industrial Convergence), Financial Services Commission (Innovative Finance), Ministry of SMEs and Startups (Regulation-Free Special Zone), and Ministry of Land, Infrastructure and Transport (Smart City, Mobility), the research attempts to find the issues related to the consistency of the supervising and regulatory ministries, and discriminatory standards such as additional and incidental conditions and thus ensuring the legitimacy of the integrated law of the regulatory sandbox.
○ Analysis of cases related to regulatory sandbox by major Ministries (committees)
- Ministry of Science and ICT (ICT Convergence, R&D)
- Ministry of Trade, Industry and Energy (Industrial Convergence)
- the Financial Services Commission
- Ministry of SMEs and Startups
- Ministry of Land, Infrastructure and Transport
○ Implications through case analysis of the regulatory sandbox by major Ministries (committees)
- Analyzed special cases for demonstration and cases with provisional permission from the Ministry of Science and ICT (ICT Convergence, R&D), the Ministry of Trade, Industry and Energy (Industrial Convergence), the Financial Services Commission (Innovative Financial Services), the Ministry of SMEs and Startups (Regulation-Free Zone-Regional Innovation Growth Project, Regional Strategy Industry) and the Ministry of Land, Infrastructure and Transport (Smart Innovation Technology Service)
- In other words, it is necessary to establish a cooperative system between the competent and regulatory ministries and acknowledge the differences of additional conditions on special cases for demonstration and provisional permission. Given that the distinction between special cases for demonstration and provisional permission cannot be distinguished, it needs to establish and regulate systematic and integrated standards by preparing ‘the combined law for the regulatory sandbox (proposal)’.
▶ A combined law for regulatory sandbox
○ The need for a combined law for regulatory sandbox
- The reason for the combined law for the regulatory sandbox is first, the unfair criteria for deliberation due to conflicts and overlapping of the composition of special deliberation committees prescribed by different individual regulatory administration laws. Second, the complicated legal system due to the increasing number of laws on rapid identification of regulation, special cases for regulation, and provisional permission. Third, difficulties in comprehending and understanding the laws arising from the complex relationships among individual laws. Fourth, high risks of errors in implementing or forcing the laws. Fifth, the supplier-centered legal system due to the various revision and enactment of the regulatory sandbox by different competent ministries
- In addition, the analysis of cases on the regulatory sandbox by each ministries show now difference in additional and incidental conditions of special cases for regulation, and provisional permission. It also shows that each competent ministries (Ministry of Science and ICT/ Ministry of Trade, Industry and Energy/ Ministry of Land, Infrastructure and Transport/ Ministry of SMEs and Startups) and regulating ministries (Ministry of Health and Welfare/ Ministry of Trade, Industry and Energy/ National Police Agency/ Ministry of Public Administration and Security/ Personal Information Protection Committee) provide different special cases for regulation, and provisional permission independently under the laws of their jurisdiction.
- Therefore, it is necessary to make differentiated incidental conditions on provisional permission and special cases for demonstration and to establish a cooperative system between competent ministries and regulating ministries. A Combined Act for Regulatory Sandbox (proposal) is needed for more systematic and efficient criteria to regulate and apply.
○ Proposal for (Tentatively named) Combined Act on Regulatory Sandbox
- A Combined Act on Regulatory Sandbox (Proposal) is consisted of Part 1 General Provision, Part 2 Composition and Operation of the Deliberation Committee on Special Cases of Regulations, Part 3 Regulatory Sandbox for New Industries, and Part 4 Penalty Provisions.
- Chapter 1 consists of Purpose (Article 1), Definition (Article 2), Principle of Prior Permission and Ex-Post Regulation, etc. (Article 3), Relationship to Other Statutes (Article 4), and Scope of Application (Article 5).
- Chapter 2 consists of Establishment of Deliberation Committee on Special Cases for Regulation of New Industries and its Functions (Article 6) in order to ensure the independency of the Committee and Composition and Operation of the Deliberation Committee on Special Cases for Regulation of New Industries (Article 7).
- Chapter 3 consists of Rapid Identification of Regulation (Article 8) which is about the liability and supports related to Regulatory Sandbox, Special Cases for Demonstration (Article 9), Management and Supervision on Special Cases for Demonstration (Article 10), Provisional Permission (Article 11), Revocation of Provisional Permission (Article 12), Improvement of Related Laws, etc. (Article 13), Liability for Compensation for Damage Related to Special Cases for Regulation (Article 14), and Supports for Special Cases for Regulation (Article 15).
- Chapter 4 is Penalty Provisions, consisting of Request for Data Submission (Article 16), Legal Fiction as Public Officials in Application of Penalty Provisions (Article 17), and Duty to Maintain Confidentiality (Article 18)
- Chapter 5 consists of Penalties (Article 19), Joint Penalty Provisions (Article 20), and Fines (Article 21)
Ⅲ. Expected Effects
○ This study on the Combined Act on Regulatory Sandbox (proposal) suggests that laws on regulatory sandbox which are currently fragmented and regulated by different Ministries needs to be combined into a single law with provisions on special cases for regulations and provisional permissions for the promotion of new industries and new technologies. A combined law would bolster industrial competitiveness and contribute to a sustainable growth and improvement of life. This study may provide the fundamental data for enacting a combined law for regulatory sandbox.