I. Responses of Government Departments and Legislative Trends Related to the Wemef - Tmon Fiasco

On July 29 and August 7, the government announced the following “Response Plans and Institutional Improvement Directions for the Wemef-Tmon Fiasco” to provide measures for consumer relief and fundamental institutional improvement directions to prevent recurrence.

●According to the Financial Supervisory Service, Wemef and Tmon's outstanding sales proceeds amount to KRW 274.5 billion as of July 31, and it is expected to more than triple in the future.

● In response, they plan to quickly provide liquidity with a total of KRW 560 billion+a/accept applications for emergency business stability funds through KOSME and SEMAS/ and receive applications for support through joint programs between KODIT and KDB.

●Expedited refunds for affected consumers are also being processed through credit card companies and payment gateways (“PGs”).

● In addition, they are considering amending the relevant laws to shorten the settlement period for e-commerce and PG companies to make it shorter than the current 40 to 60 days for large-scale distributors and to introduce mandatory separate management of sales proceeds.

II. Situations of PG Companies and Legislative Trends

First of all, as a measure for consumer redress, the financial authorities ordered PG companies, which are located in the middle of the money flow (consumer→card company→PG company→e-commerce platform→e-commerce vendor), to actively cancel payments because the Specialized Finance Business Act requires payment service providers to comply with cardholders’ requests for transaction cancellation or refund (Article 19 of the Specialized Finance Business Act). However, in the event of large-scale online payment cancellations, there is a high probability that refunds from e-commerce platforms to PG companies will not be properly executed, and in many cases, there is no payment guarantee insurance in place, so there is a strong possibility that the PG companies will bear the losses, and in reality, it may be difficult for consumers to recover damages.

To prevent a recurrence of this situation, the government's proposed system improvement plans for the PG business include: (i) separating PG business from e-commerce, (ii) strengthening registration requirements for PG companies and establishing grounds for sanctions, (iii) shortening the settlement period, and (iv) mandating separate management of sales proceeds.

The government's plans to improve the system are expected to increase the level of regulation for PG companies, which will inevitably lead to additional compliance costs for PG companies, and thus serve as a factor that will accelerate the market consolidation by separating stronger players from weaker ones. In addition, companies that operate PG and e-commerce businesses may incur some losses depending on the level of separation between PG and e-commerce businesses introduced, as they have already invested costs, while companies that focus on PG business may have business opportunities as they can absorb e-commerce companies that were previously hybrid operators as new clients.

III. Implications

The government has decided to revise the Large-scale Retail Business Act and the Electronic Financial Transactions Act to improve the system in response to the Wemef - Tmon situation, and the bills are expected to be finalized this month after collecting opinions from experts and the industry, so e-commerce companies and PG companies need to pay attention to the details of the proposed bills.

LIN has been actively analyzing the causes of the Wemef - Tmon fiasco since its early stage  and has been working on establishing response strategies and providing consulting services to predict the government's future regulatory direction in various ways and to ensure that the government's policy decisions are made rationally. LIN's Financial Regulatory Team consists of experts who have extensive experience in reviewing the Electronic Financial Transactions Act, the E-Commerce Act, and the Large-scale Retail Business Act, and have been providing in-depth advice on various legal issues. Should you need assistance in these matters, please do not hesitate to contact the experts at LIN’s Financial Regulatory Team.

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We have been performing related work for a long time at financial authorities such as the Financial Supervisory Service and the Korea Exchange and at leading domestic law firms such as Kim & Chang.
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