The new legislation on financial consumer protection was approved at a cabinet meeting on March 17, 2020. It will be promulgated in March and will become effective one year after in March 2021.1 The new legislation is a part of the government’s policy initiatives to improve the fairness in the economy.
The new legislation on financial consumer protection attempts to level the playing field between consumers and financial institutions. It represents a significant turning point as it will help enhance consumer rights and improve public confidence in financial institutions.
I. CLOSING REGULATORY LOOPHOLES AND STRENGTHENING ADMINISTRATIVE MEASURES
► The six major sales regulations2 currently applied to selected financial products will be applied to all financial products.
► Strict punishment such as punitive fines3 will be imposed on violations of the sales regulations, and the government may issue a sales ban to prevent massive consumer damage.
II. BOOSTING EFFECTIVENESS OF CONSUMER REMEDIES IN CONFLICT RESOLUTION AND LITIGATION
► Financial firms will not be allowed to file a lawsuit for the purpose of leaving the conflict resolution process and avoiding mediation, and courts may decide to halt further legal process through a stay of proceedings if the lawsuit brought to them are unresolved conflict resolution cases.
► The burden of proof in liability for damage cases will be transferred to the seller, and consumers will be entitled to the right to request information to be used in conflict resolution cases or lawsuits.
III. EXPANDING CONSUMER CHOICES AND IMPROVING TRANSPARENCY
► Consumers are entitled to the right to withdraw subscription within a certain period of time, and may resort to unilateral termination of contracts when violation of sales regulations is found.
► Financial firms will be required to explain important information such as the risk levels of investment products, and also by law provide a comparative information of financial products to consumers.
I. APPLYING SAME REGULATIONS FOR SAME FUNCTIONS
The new legislation establishes a reclassification of both financial products and sales channels.
► FINANCIAL PRODUCTS: All financial products and services are reclassified to four categories as shown below.
i) Deposit category: deposits, savings products, etc.
ii) Investment category: funds, trusts, etc.
iii) Indemnity insurance category: life insurance, non-life insurance, etc.
iv) Loan category: mortgages, credit cards, etc.
► SALES CHANNELS: All sales channels for financial products are reclassified to three categories as shown below.
i) Direct sellers: banks, insurance companies, savings banks, etc.
ii) Sales agents: investment solicitors, insurance agents, credit card and loan sales agents, etc.
iii) Advisors: investment advisors
II. EXPANDING APPLICATION OF SIX MAJOR SALES REGULATIONS
Financial institutions will be subject to the following six sales principles.
► PRINCIPLE OF SUITABILITY: Shall consider consumers’ personal assets and investment experience when selling products
The current application on financial investment products and variable insurance will be extended to all kinds of financial products.
► PRINCIPLE OF ADEQUACY: Shall notify consumers if products are deemed inappropriate given consumers’ personal assets, etc.
The current application on derivatives and derivatives-linked securities will be extended to loans and indemnity insurance products.
► DUTY TO EXPLAIN: Shall explain product details and other relevant information upon request.
The duty of explanation separately stipulated in the Banking Act, the Capital Markets Act, the Insurance Business Act and the Specialized Credit Finance Business Act will be incorporated into the Financial Consumer Protection Act.
► PROHIBITION OF UNFAIR PRACTICES: Shall not violate consumer rights through coercion, etc. when selling financial products.
Charging early repayment penalty will be prohibited if loans were issued three or more years ago. For personal loans, having a third party to stand as joint surety will be prohibited.
► PROHIBITION OF UNDUE RECOMMENDATION: Shall not provide disinformation.
Financial institutions shall not provide false or distorted information that is likely to mislead consumers when asked to sign agreements on financial products.
► PROHIBITION OF FALSE OR EXAGGERATED ADVERTISING: Shall not place false or exaggerated information on advertisements.
III. STRENGTHENING REGULATIONS AND PENALTIES FOR VIOLATIONS
► RIGHT TO TERMINATE UNFAIR AGREEMENTS: Consumers shall be entitled to the right to terminate agreements within a certain period of time when violations of sales principles have been found. A unilateral termination of agreement is possible if financial firms are not able to provide appropriate reasons.
► SALES BAN: Sales of financial products shall be prohibited if massive consumer damages or losses are expected.
► BURDEN OF PROOF: In a liability for damage case, the burden of proof lies with financial firms that need to prove that there was no intent or negligence in failing to provide adequate information.
► PUNITIVE FINES: Up to 50% of income earned from bypassing regulations shall be imposed on institutions for violating the major sales principles.
► PENALTIES: 100 million won or less6 or 30 million won or less7 will be imposed for violations.
IV. INTRODUCING NEW SAFEGUARDS FOR CONSUMERS
The new legislation aims to give more options to financial consumers, prevent losses and improve consumer remedies.
► RIGHT TO WITHDRAW SUBSCRIPTION: Sellers shall reimburse money to consumers upon receiving a request for withdrawal during a cooling-off period. It will be applied to the indemnity insurance, loan and investment categories as well as the advisor category.
► CONSUMER REMEDIES: Financial institutions shall not be able to file a lawsuit to avoid mediation during a conflict resolution process, while consumers’ right to demand information from financial institutions will be enhanced.
V. OTHER IMPROVEMENTS
The new legislation also includes measures aimed at helping consumers make rational decisions and closing regulatory loopholes in the current financial consumer protection framework.
► ESTABLISHMENT OF FINANCIAL ADVICE SERVICES: A new type of financial advice
services will be established to provide professional, impartial and independent advice services to general consumers. Financial institutions engaged in the sales of financial products are prohibited from offering advice services.
► FINANCIAL EDUCATIONAL PROGRAMS: A legal foundation has been established to operate a council on financial education chaired by the FSC vice chairman. The FSC will oversee the development of financial educational programs and conduct consumer survey on a regular basis to help enhance consumer competency.
► MANAGEMENT ROLE OF DIRECT SELLERS: Direct sellers shall bear the
responsibility of managing agents and be subject to penalties upon violation of regulations.
► SUPERVISION OF LOAN SALES AGENTS: Loan sales agents will be subject to government supervision with the new legislation.
* Please refer to the attached PDF for details.