[Free Speech] Easing Regulation: A Stepping Stone to Becoming an Advanced Financial Nation

It has already been more than 20 years since Korea set out to become a financial hub, yet it remains stuck in place. At a time when change in financial markets is accelerating, making the leap to become an international financial center is a survival strategy. However, Korea has failed to produce domestic financial firms with world-class competitiveness. Meanwhile, global foreign investment firms are leaving Korea and moving to other competing Asian cities.

The GFCI, published every March and September since 2007 by the British think tank Z/Yen, is a leading benchmark of the competitiveness of financial hub cities. As of March 2022, Korea ranked 12th in the GFCI. By contrast, Hong Kong ranked 3rd, Shanghai 4th, Singapore 6th, and Tokyo 9th, all placing above Korea among Asia’s competing international financial centers. Korea still has not overcome the barriers posed by Hong Kong and Singapore.

Looking around the world, there is hardly any place not striving to build a financial hub. Why, then, do so many seek to become one? In a rapidly changing world, many countries are recognizing the limits of growth centered on traditional manufacturing. In this context, finance is being fostered as a key next-generation industry because it offers higher profit margins than manufacturing and has a very large job-creation effect. More importantly, it creates high-quality jobs.

Korea still has a long way to go before it can become a financial hub. We can find the reason in its positive regulatory approach. Positive regulation means listing only what is permitted by law or policy and prohibiting anything not included on that list. Since only businesses stipulated by law are allowed, the industry inevitably faces narrow limits on the scope of its activities. Even when new ideas emerge within organizations, firms must first determine whether they are even allowed to start the business. For financial innovation to move forward, the “animal spirits and imagination” of capital market players must be allowed to flourish, but the outdated regulatory system is standing in the way.

Korea’s wide-ranging regulations also make it difficult to advance financial innovation. At present, regulations concerning licensing, business conduct, and consumer protection are strict and tightly designed. Hidden regulations, such as model guidelines and administrative guidance, also exert significant influence. As a result, firms can only pursue financial innovation within the narrow bounds permitted by Korean regulation. Far from becoming a financial hub in Northeast Asia, Korea is seeing financial companies leave.

Hong Kong and Singapore are in a different situation. Faster than Korea, they have established the foundations for financial companies to achieve innovation in ways suited to the digital age. They have granted large numbers of licenses for internet-only banks to major IT companies. As convergence between mobile information technology firms and finance has become active, they have been able to maintain leadership in innovative finance, including mobile finance.

Hong Kong and Singapore are also ahead in the blockchain and cryptocurrency industries because they are governed more by rules than by regulation. Rules can guarantee corporate autonomy and freedom of business. Even many Korean cryptocurrency firms have left Korea to operate exchanges and issue cryptocurrencies in Singapore and Hong Kong.

Korea’s Financial Services Commission has turned the country into a regulatory paradise in the name of protecting consumers. But in doing so, it has ignored global trends in financial innovation, held back Korea’s financial industry, and deprived people of high-quality jobs. It has also made it difficult for Korea to establish itself as a financial hub. In the end, the Financial Services Commission’s regulations have reduced the welfare of investors and consumers alike.

Korea must improve regulation to leap forward as an international financial center. If Korea’s advanced IT technology is effectively combined with finance, it has a strong chance of succeeding in the increasingly prominent fintech sector. With fintech leading the way, becoming a financial hub would not be far off. But government regulation remains locked into an outdated framework, suppressing autonomy and creativity and hindering innovation. Therefore, to make the leap to a financial hub, Korea needs to make a long-term effort to shift financial regulation from a positive to a negative approach and to improve rule-centered regulation into principle-centered regulation. If such improvements are put in place, a leap toward becoming a financial hub will not be difficult.

The obstacles can be found in Korea’s higher tax rates compared with other city-states, rigid labor regulations, and stringent financial regulation. Long-term efforts are needed to shift financial regulation from a Positive approach to a Negative approach and to improve technology centered on Rules into one centered on Principles.

As the future financial industry rapidly shifts toward non-face-to-face digital platform-based models, Korea’s potential is enormous, given its world-class ICT capabilities and outstanding human talent. Singapore has the limitations of being a very small city-state, while Japan is struggling with digital transformation due to population aging. By contrast, Korea has many strengths, including a wide range of innovative growth engines such as artificial intelligence, blockchain, big data, and biotechnology.

In particular, regulations on new financial sectors emerging from technological development, such as fintech and virtual currency, become obstacles that block industrial development itself. “Under the current positive regulatory system, when a new service appears, there is often no law even defining it, so it is either forcibly fitted into existing law or left in a legal wasteland. The Korea Financial Investment Association has stated that, in order for the ‘animal spirits and imagination’ of capital market players to be fully exercised, the capital market regulatory system should shift from the current rule-based framework to a principle-based negative system.

However, higher tax rates than other city-states, rigid labor regulations, and intensive financial regulation make it difficult for Korea to become a financial hub in Northeast Asia. In short, the key to becoming a financial hub lies both in how many opportunities there are to make money and in whether the environment is in place to support them. In this respect, a heavily regulated place can never become a financial hub.

Bomi Kim, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 금융 선진국으로 가는 발판은 규제 완화

Author: Bo-mi Kim

Date: 2022-05-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=8&idx=24772