Brokerage or Advertising of Financial Products?
The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) announced on September 7 that FinTech & BigTech companies’ recommendations of financial products, such as insurance or investment products, through their platforms would be regarded as brokerage rather than advertising. As brokerage by unregistered business entities is prohibited, big-tech and fintech companies need to modify or halt such services until they resolve the regulatory requirements.
The market reaction was swift, with both Naver and Kakao experiencing 15–20% drawdowns in the Seoul market, and Coupang, which went public on the NYSE earlier this year and had just about started to recover from a prolonged decline since the IPO, giving back a little less than 10%.
The FSC has performed a detailed review to determine if major online financial platform services comply with the Financial Consumer Protection Act. The results were shared with the service providers, and are also publicly available in Korean.
The Financial Consumer Protection Act included a grace period of six months after its enactment on March 25 this year, so the FSC action can be seen as closing any gaps prior to September 24.
In their press release, the FSC stressed that it is necessary to prevent damage to consumers due to incomplete sales, increase in brokerage fees, and bias in online algorithms due to non-qualified and irresponsible persons for the sale of financial products.
If the purpose of online financial platform service is to sell, not to provide information, it can be generally regarded as a brokerage. A clear indication here is whether the payment of commissions according to sales performance occurs, rather than just an advertisement placement fee.
Even though the online financial platform is not a financial product seller, the FSC considered whether there is a possibility that consumers may mistake the contract to executed with the platform. Thus, although consumer trust in the platform is one of the important factors in contract decision-making, it is necessary to prevent a situation in which the platform is not liable.
Overall, the market reaction seems overdone given the relatively small revenue pool impacted, but has certainly be influenced by the current regulatory tightening in China. However, in our view this is just a step to bring the platforms into compliance with already enacted law, not the first step in attempting to break up these players. Quite to the contrary, the tech platforms play a decisive role in Korea’s growth strategy, also referred to as the “K-New Deal”.
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