The government of the Republic of Korea introduced a new legislation on financial consumer protection with the goal of improving fairness in the economy, enhancing the rights of financial consumers, creating a more level playing field and strengthening the overall public confidence in the financial industry. As the newly enacted Financial Consumer Protection Act (“the Act” hereinafter) went into effect on March 25, 2021, financial institutions are now required to maintain an enhanced level of consumer safeguard measures while consumers can enjoy and exercise much broader consumer rights than previously afforded to them.
In order to simplify the classification of financial products and their sales channels and to standardize the application of same regulations for same functions, the Act introduces a reclassification of both financial products and their sales channels as shown in the table below.
FINANCIAL PRODUCTS: all financial products and services are classified into four categories.
|- Indemnity insurance||
SALES CHANNELS: all sales channels of financial products are classified into three categories.
|- Direct sellers||
|- Sales agents||
- I. EXPANDED APPLICATION OF SALES REGULATIONS TO ALL FINANCIAL PRODUCTS
- The six major sales regulations that previously applied to the sales practices of selected financial products—mandated by separate laws—will be applied to the sales of all financial products under the Act.
|Type of sales regulation||Requirement|
|i. Principle of suitability||
|ii. Principle of adequacy||
|iii. Duty to explain||
|iv. Prohibition of unfair practices||
|v. Prohibition of undue recommendation||
|vi. Prohibition of false or exaggerative advertising||
- II. STRONG PENALTIES FOR VIOLATING SALES REGULATIONS
- In order to encourage strict compliance with the six sales regulations, financial institutions will be subject to monetary sanctions of up to KRW100 million. In addition, a punitive fine of up to 50 percent of profits gained from bypassing regulations will be imposed in the case that the violation is found to be in the following categories of regulations—(a) duty to explain, (b) prohibition of unfair practices, (c) prohibition of undue recommendation and (d) prohibition of false or exaggerative advertising. As the six sales regulations apply to direct sellers, sales agents and advisors, individual employees of these entities are not subject to either monetary sanctions or punitive fines aforementioned.
- III. PREVENTION OF CONSUMER LOSSES & PROVISION OF EFFECTIVE REMEDIES
- A new set of consumer rights and arrangements are put in place to prevent consumers from falling prey to mis-selling and other unfair or inappropriate sales practices and to provide more effective remedies for consumer damages. First, consumers are entitled to the right to withdraw subscription within a certain period of time (cooling-off period) and they may exercise the right to terminate a contract if the seller is found to have violated the sales regulations without incurring any monetary penalties or fees for cancellation. A unilateral termination of agreement is possible if the financial firm is not able to provide appropriate reasons.
Prior to the implementation of the Act, the burden of proof in liability for damage cases lied with consumers whereby consumers had to prove a wrongdoing done on the part of the seller. However, the Act transfers the burden of proof to the seller in which case financial institutions are now required to come up with proof that there was no intent or negligence on their part in failing to provide the necessary information.
When massive consumer damages or losses are expected from the sales of a particular financial product, the financial authorities may issue a sales ban on that product. In addition, the Act prohibits financial institutions from filing a lawsuit against an individual in attempt to avoid mediation with the same person until the conflict resolution case (KRW20 million or less) is finalized.
- IV. INTERNAL CONTROL STANDARDS FOR CONSUMER PROTECTION
- Financial institutions need to draw up their own internal control standards and have them ready for implementation by September 25, 2021. In principle, the specific criteria to be included in their internal control standards will be identical to the best practice guidelines on financial consumer protection that were widely in use by financial institutions over the years. During the first half of this year, financial associations and federations representing each sector will set up committees to help establish a standardized internal control framework for each sector.
- V. OTHER IMPROVEMENTS
- The Act also establishes provisions that are aimed at assisting financial consumers to make more rational decisions when making investments and closing regulatory loopholes in the overall regulatory framework of financial consumer protection. To this end, the Act establishes a legal foundation for the FSC to oversee the development of financial education programs and conduct consumer survey on a regular basis to help improve the financial literacy of the general public and increase consumer competency. In this regard, the FSC will chair financial education council meetings regularly to oversee the development of diverse educational and counseling programs intended for different groups and target audiences.
The enactment of the Financial Consumer Protection Act is a long overdue outcome of the government’s efforts to help create a more level playing field between consumers and financial institutions. It marks an important turning point in not only boosting the rights of financial consumers but also helping to restore the overall public confidence in financial institutions. In this regard, first and foremost, the Act helps to close regulatory loopholes in ensuring a more thorough consumer protection through an expanded application of the six sales regulations to the sales practices of all financial products. Second, the Act increases the effectiveness of consumer remedies as financial institutions will not be allowed to avoid the conflict resolution and mediation process by filing a lawsuit. Consumers can file claims against financial institutions on a more equal footing than it was possible before as they are entitled to the right to request relevant data from financial institutions and the burden of proof also lies with financial institutions. Third, the Act is expected to help expand consumer choices and improve transparency in financial transactions as it guarantees the right to withdraw subscription within a certain period of time and also to resort to unilateral cancellation of contracts if the seller has been found to have violated the sales regulations
Working to Ensure Seamless Implementation
The financial authorities along with the relevant industry groups will continue to make themselves available for assistance throughout the year of 2021 in order to ensure a seamless implementation of the Financial Consumer Protection Act. A public-private joint response team has already been set up for operation to check how the new rules are being implemented and to find out areas for improvements. The joint response team will begin to hold meetings monthly starting from April this year to go over its findings and work on improvements. In the meantime, the government will seek to find ways to apply the same level of consumer safeguards in the mutual finance sector through close coordination with the relevant ministries. The authorities will continue to work on the promotion of the new rules on financial consumer protection using diverse online and offline channels in order to raise public awareness and help both consumers and sellers better understand about the newly established consumer rights in financial services.
Last updated: Mar. 31, 2021