2009 - 01 Market Access: Restrictive Application of Regulation governing Business Delegation / Shared Services
At present, the "Regulation on Business Delegation of Financial Institutions" enacted in 2000 and amended in 2005 requires that all ‘essential’ business of a financial services institution be conducted within that institution, and not delegated to third parties. The definition of a ‘third party’ in the regulations includes overseas head offices (and other offices) of a foreign financial institution. As a result, foreign financial institutions must seek prior FSS approval in order to conduct any business functions in locations outside Korea. The FSS may then determine whether or not these functions are ‘essential’, and whether they therefore believe that they should be conducted inside Korea. Furthermore, and more importantly, even the delegation of ‘non-essential’ activities requires de-facto FSS approval (the use of the terminology “prior report” is a mis-nomen as it is a de-facto prior approval). This is a major impediment to the effective operation of international financial services providers.
It would be desirable for Korea to provide foreign financial institutions with more flexibility in delegating any back office functions (including, but not limited to, trade and transaction processing functions, accounting functions, data processing functions, credit and market risk analysis functions, sharing of offshore based market- and credit risk calculation systems, sharing of global general ledger systems etc) to offshore affiliates for the sake of organizational efficiency and cost synergies. Global firms run globally integrated platforms and operating systems and should not be expected to ‘carve out’ Korea as a stand-alone territory with local stand-alone systems. It would be appreciated if foreign financial institutions incorporated in Korea as subsidiaries were afforded the same treatment as branches in this regard. Although the Business Delegation Act applies to local and foreign financial institutions alike, regardless of their legal status (branch or subsidiary),- those foreign financial institutions incorporated as subsidiaries have experienced greater difficulties in obtaining approval for sharing global IT and operating systems (where the server is located outside Korea). The same applies for
obtaining approvals for delegating any back office function to offshore affiliates. The FSS expects foreign financial institutions, run in the form of locally incorporated subsidiaries in Korea, to not rely on any system housed on an offshore server platform. This runs counter to the global best practice applied in other financial centres (incl. Japan and China). Since the Business Delegation regulation already provides a legal framework for the delegation of non-core back office functions and services, it appears to be within the discretion of FSS to adopt a more accommodating stance.
It should also be noted that since the applicable regulation does not differentiate between outsourcing and insourcing of functions, the same time consuming approval procedures apply for foreign banks who may be seeking to bring onshore certain operations. This is hardly consistent with the stated hub aspirations. We would encourage the FSS to streamline or completely eliminate approval procedures for banks seeking to insource certain functions into Korea.
Under the global operating platform of most multinational financial institutions, certain back office functions and IT systems are often centralized in hub locations or in shared services centers.- Most jurisdictions (including Japan) allow the delegation of back office functions to offshore affiliates subject to conditions that are similar to those spelled out in the Business Delegation regulation. We note that FSS has recently started to allow certain back office functions (e.g. legal, tax, HR) to be shared by the legal entities in Korea that belong to the same group, which is an encouraging step in the right direction. A further relaxation of the application of the Business Delegation regulation would significantly improve the operating environment for foreign financial institutions in Korea and stimulate growth in their activities.
We understand the current KORUS FTA agreement, pending ratification, includes similar provisions on this issue (refer to Chapter 13, Annex 13-B “Specific Commitments”, Section C “Performance of Functions”)
2009 - 02 Market Access: Data Processing / Data Transfer
Global financial services firms process data centrally, typically utilizing either one or two back-up data centers. This allows for both operational efficiency, and clear regulatory reporting and transparency standards. In Korea, substantial legal restrictions continue to apply and effectively prohibit the sharing of data overseas, unless specific written consent is provided by the clients in Korea. The Korean law (Act on Real Name Financial Transactions and Guarantee of Secrecy 2002) regards overseas head offices or data processing centers of a financial institution active in Korea as ‘third parties’ or other legal entities.- Similar restrictions exist under the Credit Information Act (1995) which also requires a prior written consent before transfer of credit information is permitted.
This restriction could be overcome if the regulation were to be changed by recognizing that overseas offices belonging to the same group of companies are not ‘third parties’.
We understand that the current KORUS FTA agreement, pending ratification, contains a commitment from each party to allow full onshore-offshore data processing integration within a period of 2 years from the date of the FTA agreement.
[Relevant Regulations: Act on Real Name Financial Transactions and Guarantee of Secrecy (2002) Art. 4.1; Credit Information Act (1995); KORUS FTA Annex 13-B]
2009 - 03 Market Access: License Issuance
Bearing in mind Korea’s policy goal to become a world-class international financial center, the Korean government would be well advised to remove any remaining market access barriers.- Under the current license application process, it has been the practice of the FSS to verbally advise applicants for new business licenses on whether and when the FSS is ready to receive applications. The licensing process in Korea can take anywhere between 3 - 12 months due to extensive preconditions that often must be met.
We believe that enhanced market access to the Korean financial services market would create a "win-win" situation for Korea and foreign financial institutions, as this would increase the transfer of know-how and new products and services into Korea, create more skilled jobs, and thus further support the government's North East Asia financial hub initiative.
2009 - 04 Consultation on New Regulations
We are encouraged by the regulator’s commitment to promote the alignment of Korean regulations in the financial services sector with global best practices.- We would like to advocate that the regulatory authorities allow more than the current minimum of 20 days of industry consultation on any major new laws and regulations in the financial sector. At present, new regulations are promulgated only in Korean language and often implemented within a matter of weeks of foreign firms being informed, not allowing sufficient time for translation into English and hence making it difficult for foreign firms to understand the changes and provide any feedback.
The EUCCK recommends minimum 60 days prior industry consultation on any major new laws and regulations in the financial sector.
We appreciate the vast amount of translation of existing Laws and Regulations that started since January, 2007, however, we would recommend to focus first on the translation of new regulations and newly announced amendments of regulations, as they require our first priority attention.- Amongst others, it would be desirable to allow the use of English language as official business language to conduct a bank’s operations in Korea and to remove the restrictions on foreign nationals holding board seats, senior managerial positions, or essential personnel in Korea.
2009 - 05 Issuance of Securities by Korean Branches of Foreign Financial Institutions
Currently, the Corporate Code does not allow Korean branches of foreign financial institutions to issue local bonds, warrants or notes as they are not locally incorporated entities. We believe that foreign financial institutions, incorporated offshore, should be allowed to issue bonds/notes/warrants in Korea by offering and issuing such instruments through (i.e. in the name of) their respective Seoul Branches.
We believe it would be beneficial for the development of the local capital markets if the Korean branches of foreign firms were allowed to issue debentures / notes / warrants as it would promote the diversity of financial products available in the market.
[Relevant Regulations: Art. 469 of the Commercial Code “Offering of Bonds”.
2009 - 06 Further Relaxation of Reporting Requirements under Foreign Exchange Transaction Regulations
We are very encouraged by the MoFE announcement in May 2006 that it will accelerate the liberalization of the FX deregulation plan to be completed by 2009, ahead of the original 2011 schedule. The new plan calls, amongst others, for a softening of the procedural reporting requirements step by step towards a simple reporting to “foreign exchange banks” and also for a further liberalization of capital account transactions. We would find it desirable if the deregulation plan were to include the simplification of the regulatory reporting process and further relaxation of cross-border loan transactions between residents and non-residents in both local currency and foreign currency, which currently require “prior discussion” (= disguised approval) from MoSF before being reported to the Foreign Exchange Bank.
The EUCCK recommends minimum 60 days prior industry consultation on any major new laws and regulations in the financial sector.
We appreciate the vast amount of translation of existing Laws and Regulations that started since January, 2007, however, we would recommend to focus first on the translation of new regulations and newly announced amendments of regulations, as they require our first priority attention.- Amongst others, it would be desirable to allow the use of English language as official business language to conduct a bank’s operations in Korea and to remove the restrictions on foreign nationals holding board seats, senior managerial positions, or essential personnel in Korea.
2009 - 07 “Firewall” between Banking and Securities Business
We advocate the adoption of a more open, "universal banking" model in Korea's financial services sector which would remove barriers between banking and securities industries. We congratulate the MOSF on having succeeded in introducing the “Financial Investment Services & Capital Market Act” which streamlines and consolidates the capital market related laws into a single law, while tearing down barriers in the non-bank financial institutions area, leaving only three functional barriers between banking, insurance and financial investment services providers.
This is a positive step in the direction of Universal Banking system and we would encourage the government to eventually consider “breaking the fire-walls” further between banking and securities as well, as is the trend globally, whilst maintaining “Chinese Walls” to prevent conflicts of interest.
