Korea needs 'regulatory sandbox' for financial innovation

By Park Hyong-ki

Suh Jeong-ho

The country's regulators need to be more “lenient and flexible” with startups so they can come up with innovative and convenient financial products and services, a local researcher said.

Startups should have the freedom to maximize their creativity, play with ideas and test them as fast as they can in a “sandbox” environment, free from constant worries about rules and regulations.

The term sandbox comes from the U.S. startup community, referring to an environment that enables engineers and strategists to let their imaginations run wild, and play and build something as if they were children making sandcastles.

The term is getting more popular as Britain has used it as a tool to bolster innovation in financial technology (fintech) by paving the way for financial startups to try new, innovative methods.

“Korea is far behind other countries such as Britain, Singapore and Hong Kong in launching this regulatory sandbox system for fintech startups,” Suh Jeong-ho, a senior research fellow of the Korea Institute of Finance, told The Korea Times.

“Having this is important especially in the digital age where companies have to move, build and acquire customers fast with less regulatory interruptions.”

Lawmakers are currently reviewing a bill to establish the regulatory sandbox for fintech startups. The researcher noted the ruling and opposition parties are in agreement about this bill, but it does not seem to be high on their priority list.

This bill requires regulators to change the way they supervise and monitor financial companies.

Instead of trying to reign over companies with tightened rules, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) should help guide financial startups with a set of principles, Suh added.

For instance, if there is a startup that wants to introduce an insurance product, the regulators should let it do so after a short period of product testing without having to pay a lawyer to see whether it meets minimum capital requirements.

They do not have to abide by certain requirements like established companies when most startups only seek to introduce products on a small scale in the beginning.

“Under the current regulatory system, it takes too long for startups to gain approval to launch a product. By the time they get a license, it would already be too late for the product to even have a chance to cross the chasm and reach the general population,” Suh said.

“Regulators should work side by side with startups during the process of their ideation, pivoting and product launching. In other words, they should provide a regulatory service tailored to startups.”

The tailored service would include providing guidelines on ways to minimize risks and harm to customers, he noted.

Startups do not have the capital to face “strict, absolute liability” when trouble arises stemming from product defects.

This is why regulators should work with startups from the start to ensure a successful, yet rapid product launch.

“The sandbox system could further help the country create a virtuous cycle in startups,” Suh said.