KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Background and Purpose

▶ Considering that the credit card crisis in 2003, the savings bank crisis in 2011, the Dongyang crisis in 2013, and the insolvent private equity fund crisis in 2019 were preceded by related deregulation policies and institutional improvements, the future discussions on financial deregulation and other policies and institutional improvements should be discussed through more careful review.

○ Discussions on establishing improvement measures such as deregulation require a close analysis of short-term and mid- to long-term outcomes and their side effects, rather than a system improvement plan that considers short-term policy outcomes.

- In the case of the financial crisis that occurred previously, there were aspects in which deregulation was discussed and implemented uncritically, with an emphasis on short-term policy outcomes.

○ There is a need for an objective review of the risks that may arise when focusing on the industrial aspect of finance and increasing its size and profitability compared to the influence that the financial market has.

- It is true that the financial sector has a significant impact on the global market and economy due to its economic effects and synergy effects as a financial industry, but unlike general companies, financial companies must also consider enhancing the inherent role of finance, such as maintaining soundness and reducing risk, and thus deregulation is essential.

▶ The “Act on the Governance Structure of Financial Companies (hereinafter referred to as the “Financial Company Governance Structure Act”)” introduced in 2016 stipulates matters related to the governance structure and management of financial companies.

○ The system of periodic review is a post-management system that verifies compliance with preventive measures and related regulations through management and supervision of whether the internal control system of financial companies or the autonomous external monitoring system by market participants, etc. are functioning well, and soundness regulations for financial stability are operated to prevent financial regulation due to imperfections such as information asymmetry occurring in the financial market.

- Before the relevant system was established in the Financial Company Governance Structure Act, the examination of the requirements for maintaining the qualifications of major shareholders was applied only to banks, bank holding companies, and mutual savings banks. However, in order to protect consumers such as investors due to the emergence of new financial products and to transform financial policies due to the occurrence of financial crises and the collapse of the financial system, an integrated financial law system was established to enhance the supervisory effect.

- In addition, there is a policy aspect that seeks to consistently and unifiedly promote financial company governance based on a single standard while minimizing differences in governance structures between financial sectors as much as possible.

▶ This study analyzes the system and cases related to the examination of major shareholder eligibility under the Financial Company Governance Structure Act, analyzes the effectiveness and influence of the system, and suggests future legislative directions and improvement measures through establishing requirements and standards that take into account the legislative intent and efficiency.

○ The examination of eligibility for a large shareholder of a financial company is accompanied by a determination as to whether the company 'maintains the qualification' even after satisfying the 'qualification requirements for a large shareholder', which is part of regulations on entry into financial companies, such as authorization, permission, registration, approval for change of large shareholders, etc.

- Standards for the effective application of the system for examination of qualifications for large shareholders under the Act on Corporate Governance of Financial Companies and future directions for improvement thereof, based on major cases of the system for examination of qualifications for large shareholders; To formulate a more reasonable improvement plan in consideration of the necessity and purpose of regulation to protect financial consumers;

○ A more reasonable improvement in consideration of the necessity and purpose of regulation to protect financial consumers. Contributing to the establishment of an effective system by presenting the standards for the future principles of financial regulation, the direction-setting for the establishment of the system, etc. in order to prepare a proposal.

 

Ⅱ. Main contents

▶ Since financial regulation is a regulation for the substantial realization of the purpose of regulation, effective regulation means regulation that conforms to the perspective of opportunity cost and financial innovation in the realization of its purpose.

○ In regard to financial regulation, it is necessary to prepare a regulatory system that can properly create a foundation for a competitive environment by ensuring consumer protection, risk management, and soundness and safety of financial markets through sound financial development.

- Financial regulation can be classified into self-regulation, legal regulation, or public regulation, depending on the entity that implements financial regulation. In the case of mutual supervision, the supervisory agency regulates financial institutions on the basis of legal force.

▶ The reasons for deeming that the governance structure of a financial company is different from that of a general company which is a non-financial company are: ) The fact that the systemic risks of a financial company may cause a financial crisis and be a direct cause that may have a great impact on the domestic and overseas economies; and

○ This is because, in the case of financial companies, the scope of the corporate governance structure covers a wide range of categories including depositors, creditors, persons related to deposit insurance, etc. in addition to stockholders, in contrast to general companies which regard shareholders as the principal parties.

- Transactions, etc. of financial instruments which are rapidly developing and becoming more complex by utilizing new technology, etc. shall be promptly managed and supervised by experts. There is a limitation in that it is difficult to guarantee the profits.

- The current Act on Corporate Governance of Financial Companies was enacted for the purpose of enacting functional statutes, taking into account the peculiarity of financial companies, the situation of each financial sector and the situation in which the improvement of the governance system has been progressed in various forms at the level of individual laws, etc; 'Regulation of large stockholders of financial companies' is also dealt with in general companies under the Commercial Act, but in the case of financial companies, it is highly likely to bring about the soundness of the system and poor risk. Where various regulations, such as entry, acts, ownership, etc., have been imposed in order to secure qualified large stockholders through such means.

○ The root cause of the invigoration of new innovative financial industries, such as online investment-linked financial business and virtual asset industry, is the positive regulation method in financial regulation.

- The Finance Act presents the public interest, such as the protection of financial markets, as the basis for financial regulation with respect to judicial financial transactions, but since it is a restriction on private transactions for the public interest, it is understood as a negative regulatory basis. In other words, the fact that stricter regulation is applied than the realm, that is, a positive regulatory basis that can explain the legitimacy of strict regulation is required.

○ Regulation of soundness or regulation of governance structure shall be a special item of regulation different from the purpose of protection of property in consignment under the Companies Act. The minimum specific provisions suitable for the purpose of regulation shall be required only in cases where there has been a previous regulation.

▶ The examination of qualifications for large stockholders shall be conducted in three phases according to the contents or application period, and the first stage shall be the examination as to whether the qualification requirements at the time of incorporation, such as the risk of undermining the soundness of the relevant financial company, the appropriateness of the size of assets and financial standing, etc. are met; In the second stage, when a large shareholder is changed, and in the third stage, the maintenance of qualification requirements after incorporation; Examining whether or not.

○ The Act shall provide for (1) financial supervision to ensure professionalism and honesty of large shareholders, directors, etc. as a premise for inducing sound management of financial companies, and (2) to prevent the use of financial companies for criminal purposes. Aspects of countermeasures against financial crimes (iii) Enacted to verify the responsibility of large shareholders of financial companies to financial consumers;

- Large stockholders are defined by dividing them into the largest stockholder and major stockholders, and the largest stockholder is the stocks owned by the principal and his/her specially related persons on their own account (their stocks and the stocks and the relevant persons in whose name they are on the basis of the total number of issued voting stocks of the corporation); Where the total number of related depositary receipts is the largest, and the major shareholder (1) shares at least 10/100 of the total number of outstanding voting shares of the corporation (securities related to such shares) on his own account, regardless of whose name is in his or her name; Deposit; A person who owns securities (including securities); Shareholders who exercise de facto influence over the relevant paragraph shall be regarded as shareholders.

- Contents of the examination of eligibility for large stockholders shall be stipulated in terms of sufficient investment capability, sound financial standing, social credit requirements, etc.

▶ The current regulation systems of countries around the world are the positive regulation system, the negative regulation system, or a combination of them, and various regulation systems in the economic field are being operated.

○ As to some of the representative finance-related Acts and subordinate statutes, the Banking Act stipulates that authorization must be obtained after meeting the requirements for the principal's authorization; the Financial Holding Companies Act requires authorization from the Financial Services Commission; the Insurance Business Act grants permission; and the Specialized Credit Financial Business Act requires authorization; The operation of a positive regulation system that makes it impossible to engage in any financial business without obtaining such authorization and permission in advance, as it requires registration, authorization under the Financial Investment Services and Capital Markets Act, and permission and registration under the Electronic Financial Transactions Act;

- The requirements for obtaining authorization and permission for a financial business are too numerous and complicated, and the economic activities of the people are excessively restricted because there is too much room for discretion in granting authorization and permission and it takes too long to obtain authorization and permission.

- Under such a positive system, negative factors such as bribes are likely to act in order to obtain authorization and permission, and it is difficult to actively respond to new and innovative technologies. Occurrence of a problem;

○ The details and methods of the current regulation on activities of the financial industry shall be determined by the enumeration-based regulation method and the principle-based regulation.

▶ Combination of embankment methods; A representative example of the method of enumeration is the method of limiting the scope of property subject to trust of a trust business entity under the Capital Market Act, and the general principles of business activities under the Financial Consumer Protection Act as an example of principle-based regulation.

○ In the Capital Market Act, financial regulation was converted from the previous regulation by institution to the regulation system by function; In the field of Jikdo banks, insurance, and securities, it is impossible to keep up with the trend of the times when big tech advances day by day due to regulations by product and institution and the convergence of financial and non-financial industries is actively progressing, so it is difficult to enter into a new financial industry. That there is no choice but to

- It is necessary to convert the current regulatory system for each product and each institution into a regulatory system for each function, such as settlement, receipt, and sale. The procedural limitations include the absence of legal examination deadline, long-term examination period, non-compliance with the legal examination period, discretionary examination period, complexity and repeatability of examination procedures, and the absence of a system for disclosing civil petition cases in other countries and in the Republic of Korea., vagueness, etc. of the scope of administrative discretion;

○ When examining the absence of statutes or regulations, the length of the examination period, non-compliance with the legal examination period, and the discretion of the examination period, the time limit for authorization or permission is left to the discretion of the authorizing or permitting authority because the statutes or regulations do not determine the examination period in the authorization or permission procedure, and even if such deadline is determined; Even if the provisions of Acts and subordinate statutes have been established, the examination period is bound to be long in that there is no particular sanction against the overdue examination period, considering that such statutory provisions shall be regarded as voluntary provisions rather than compulsory provisions.

- The examination procedures may be complicated and repeated indefinitely due to the lack of preparation and lack of knowledge of those who intend to obtain authorization or permission, the insufficiency of documents, funds, etc. necessary for authorization and permission, and the repetition of orders to supplement the application documents for authorization or permission, etc.; There is a problem in that the complexity and repeatability of procedures may be greater due to unnecessary repetition and delay of procedures by financial regulatory authorities, procedures and requirements not specified in Acts and subordinate statutes, etc.

○ Among the problems of entry restrictions, the problems in terms of contents are that in many cases unnecessary requirements or documents, etc. are required in the authorization and permission procedures, problems arising from the unclear and indeterminate concept of requirements for authorization and permission, unnecessary or excessive prerequisites for prior entry, and 2019; The problem, such as the insufficiency of the small license system, which is a light unit of authorization and permission, which has been discussed as to the necessity of the license even in Korea after 2000, has been raised.

- With regard to problems arising from the ambiguous and indeterminate conception of requirements for authorization and permission, the statutes and regulations shall be prescribed in statutes, such as "the business shall be feasible" "the business management plan shall be sufficient" "sufficient facilities and funds to conduct the financial business", etc.; Since the prescribed  requirements for authorization and permission are not clear, there is a lot of room for the discretion of the authorization and permission authority, and in many cases, it is executed unreasonably With regard to unnecessary or excessive prerequisites for pre-entry, the case where the entry into the financial business is frustrated due to excessive regulation on the requirements for capital or facilities, etc., but the entry into the financial business is hampered due to excessive requirements, such as capital, etc.; 

- The examination of qualifications of large stockholders shall prevent the occurrence of systemic risks, and accordingly, means to filter out the abuse of influence of large stockholders in advance. In light of the necessity of such preliminary regulation, the 'examination of qualifications of large shareholders' itself is necessary, but if the requirements for examination are not related to the possibility of abuse of influence by large shareholders, excessive restrictions on property rights may be imposed without playing a financial regulatory role. May be;

○ It is necessary to examine whether it is necessary to include the professionalism, experience, etc. of a large shareholder proactively in addition to objective and passive requirements as a requirement to  assess the possibility of abuse of influence by large shareholders of a financial company in addition to the requirements for examination of qualifications for large shareholders who have the effectiveness of financial regulation.

- Regulations exist that directly regulate acts of abusing influence by large shareholders, such as restrictions on transactions and prohibition of abuse of influence by large shareholders, as regulations after holding the status of large shareholders, and it is desirable not to prescribe too extensive disqualification requirements for the examination of eligibility for large shareholders.

- In the case of the space industry, not only shall the research and development activities for space development and the examination of the operating system therefor, etc. be accompanied, but also the research and development system for the participation of private business operators shall be separately provided. It is urgently needed to be prepared;

- To refrain from listing only objective and passive requirements (criminal records, sanctions records, etc.) for the sake of legal stability, and to prepare requirements for maintaining qualifications to properly select disqualified large stockholders based on the analysis of practical cases and the reality of regulations. It shall be done; 

- In order to protect financial consumers based on the trustworthiness of finance, positive regulation is required, such as qualifications of financiers, prohibited financial activities, etc., but negative regulation is required in new industries;

○ Even in the field of digital finance, such as fintech, where the entry restrictions, which have the essence of limiting the business capabilities of financiers, are not to specify financial capabilities, etc. of financiers, the damage to financial consumers that may be caused by poor financial capabilities shall be taken into consideration. Negative regulation is not appropriate in such a case, but the limited operation of negative regulation is required for the entry of a new type of financial business;

- Negative regulation is also possible, but it is necessary to design the regulation (related to the small license to be described later) so that the existing positive regulation will work if the growth exceeds a certain scale.

○ Financial regulations can be regulated only when they are legislated prior to the time of financial activities, and thereafter, financial activities can be regulated; and 

- In order to regulate by legislation, it is required to have a special purpose and legal provisions permitting such purpose The examination of qualifications for a large shareholder shall be a system for examining whether a large shareholder can maintain his/her soundness if he/she participates in the management of the company at the time of entry through a qualification examination for a large shareholder, and a maintenance examination to examine whether the relevant large shareholder continues to maintain his/her qualifications. As for the requirements for the qualification examination for large stockholders, it is necessary to make the requirements for entry regulation which is the qualification examination and the requirements for the maintenance of qualifications the same in that they are composed of.

○ In the case of stipulating the matters subject to the examination of restrictions on entry of large stockholders and those subject to the examination on the maintenance of eligibility of large stockholders, the fact that the persons subject to the examination on the maintenance of qualifications for large shareholders shall be limited to those who actually exercise control over the management of financial companies, from among the persons subject to examination on the entry of restrictions on the entry of large stockholders, does not mean that the subject matters shall be defined completely differently. Will do;

- It is not necessary to newly define the scope of a person who is the largest investor from among the largest shareholders, but a person who exercises de facto influence over the relevant financial company shall be determined, but it is possible to consider a plan to limit the scope of such person to major shareholders.

- (1) Largest shareholder and (2) the subject matter of examination of qualification maintenance regulation shall include the remaining persons subject to examination, excluding stockholders specially related to the largest shareholder from the existing authorization and permission and examination of change of major shareholder; and A major shareholder; (3) a shareholder who is specially related to the largest shareholder; and (4) the largest shareholder of a corporation which is the largest shareholder (the person who has de facto control over the corporation which is the largest shareholder shall be a major shareholder; and (Including a person who has de facto control over the largest shareholder, if it is different from the largest shareholder of a corporation); (5) Act which is the largest shareholder; It may be regarded as a representative, etc. of a person;

○ Examination of the introduction of regulations to actively examine the requirements, etc. for evaluating the expertise, experience, and ability of large shareholders shall be accompanied by examination of the qualifications of large shareholders.

- Considering that the examination of qualifications for large shareholders is a system for examining whether large shareholders have a great influence on the management of a financial company, the most necessary examination requirement is the evaluation of expertise, and it is necessary to examine such qualifications. Spring;

○ Notwithstanding the measures, such as corrective orders and restrictions on the exercise of voting rights, due to failure to meet the requirements for maintaining the qualifications of large stockholders;

- A review is necessary in that the requirements may not be met, notwithstanding the foregoing

- In particular, in the case of the fact that, unless a system to satisfy the requirements, such as an order to dispose of stocks, is prepared, doubts are bound to be raised as to the effectiveness of the introduction and operation of the qualification examination system for large stockholders, and the provisions under the current Banking Act and the Mutual Savings Banks Act. In view of the stricter requirements, etc., it is necessary to prepare an improvement plan to apply the minimum standards suitable for the reality.

- In order to overcome the limitations of rule-based regulation, the introduction of principle-based regulation has been advocated recently. The term "principle-based regulation" means a type of regulation in which regulations are comprehensively regulated centered around general principles and detailed regulations are entrusted to a person who is a person subject to regulation, which is a person subject to regulation.

○ Principles are more abstract than regulations, and in principle-based regulation, the observance of detailed regulations cannot be determined. It is a result-oriented regulation because emphasis is placed on whether the principle is complied with, that is, whether the offender has actually violated the purpose of regulation pursued by the principle.

- Principles-based regulation may facilitate competition by easing market entry, revitalize economic activities, and directly and proportionally regulate the results of economic activities on legal grounds.

- The merits, such as that the cost of compliance falls on the financial company itself, not on the regulating authority, and that the financial company's better understanding of financial and contract laws increases financial capabilities and compliance capabilities;

- Recognizing the limitations that it is technically impossible to accept all transactions or products of the rapidly changing financial market as detailed regulations is legislatively and technically impossible, and if the regulatory system is converted to a principle-based regulation method, it is likely that the existing legal system will not be able to do so. A flexible and flexible approach is possible when new products or transactions are introduced;

○ In principle-based regulation, which is centered on principles, not regulations, specific regulations are required to eliminate legal uncertainty of offenders, but if they are entrusted to self-regulation, it is necessary to reduce the burden on the regulating authority and to prepare reasonable norms by market experts.

- Self-regulation can be broadly classified into the form of enactment of norms and the execution and operation of norms. Internal voluntary norms are enacted in the form of self-regulation agreements, standards for self-regulation, code of conduct, guidelines, etc.; It is used for the enforcement of voluntary norms, inspection of violations, mediation of disputes, public disclosure activities, such as public announcement of violations, provision of incentives, internal sanctions, etc.;

○ In particular, the small license system allows new fintech enterprises, which have difficulty in entering the financial industry, to obtain a license easily. Regulatory methods that subdivide the entry requirements for the financial business so that the financial business can be commenced;

- In the case of a startup, which commences a financial business without any entry requirements or only through registration and attains a certain level, it shall again meet the entry requirements required for the institutional financial business and expand its scale, thereby laying the foundation for the growth of the startup into a middle-standing enterprise.

 

Ⅲ. Expected effects

▶ The effectiveness, influence, etc. of the system shall be analyzed by analyzing the system, cases, etc. of the examination of qualifications for large shareholders under the Financial Companies Governance Act, and the review of regulatory standards, principles, etc. for establishing desirable financial regulations based on the case; Suggesting the direction of future legislation and improvement measures through the matters concerning restrictions on large stockholders under the Financial Companies Governance Act are more restrictive than those of banks or mutual savings banks 

○ It does not need to be strengthened, but it shall present clearer standards in the scope of the subject matter of examination of qualifications for large stockholders, and the order to dispose of stocks as a system for reinforcing measures to take corrective measures and restrictions on voting rights in cases where the standards for examination of qualifications for large shareholders are inappropriate; It is necessary to examine measures to improve the effectiveness of the system by introducing it.

- In the case of regulation based on the examination of qualifications of large shareholders, there is a risk of infringement on the property rights of  shareholders and interference with or deprivation of shareholders' rights, etc., but considering the purpose of the legislation that the system was introduced and operated as it needs to be managed as a means of pre-regulation due to the characteristics of the financial industry. In such a case, it is desirable for the operation of the system to be accompanied by an examination to enhance the legislative effect by making improvements through measures to determine the scope of application and the scope of dispositions, etc. more clearly.

○ Financial regulation is classified into regulation by business area and regulation by function according to whether the regulation standards are to be the nature of financial activities or functions of financial activities, and are divided into positive regulation and negative regulation based on the aggressiveness of regulation, and the timing of regulation; It may be classified into pre-regulation and ex post-regulation on the basis of standards. Although the regulation by function is excellent in terms of 'same regulation for the same function', the regulation by business area cannot be neglected based on the nature of financial activities from the point of view of 'similar nature and similar risk'. In the area where regulations by business right exist, it is necessary to legislate on the basis of the regulations by business right and to impose similar regulations on the financial business which performs the same functions and to give careful consideration to the characteristics of the relevant business right.

- Negative regulation is a more progressive regulation than positive regulation in order to secure global competitiveness through the development of the financial industry, but there is a risk of infringing on the protection of trusteeship, which is the basis of financial regulation, that is, the interests of financial consumers. In addition, the entry regulation needs to be introduced in the form of a small license because the positive regulation is appropriate in nature, and the negative regulation method shall be introduced in the regulation of activities including the digital finance sector, such as fintech.

- There is confusion in the concepts of ex post facto regulation, such as principle-based regulation, negative regulation, etc., but these concepts are considered irrelevant because the regulation methods are classified based on the time of conduct and the time of regulation. It shall be permitted only on a limited basis.