Korea’s new Financial Consumer Protection Act (FCPA) came into force on March 25, 2021.
1. Purpose
Enacted in March 2020 after lengthy debate in the National Assembly, the recent coming into force of the FCPA marks the culmination of a lengthy legislative process that began in the wake of the 2008 global financial crisis and 2009 knock-in – knock-out (KIKO) options debacle.1) The financial fallout from these incidents made starkly clear the need for strengthened consumer protection in the financial sector, due to the asymmetry of information between financial consumers and their much larger and sophisticated institutional counterparties.
The FCPA aims to strengthen consumer protection through (i) stronger sanctions and (ii) uniform regulation of financial product sales by consolidating various consumer protection provisions from separate statutes into a single comprehensive statute, and regulating the diverse array of marketed financial products by their relevant type and function (e.g. deposit products, investment products, insurance products and loan products) under provisions that uniformly and specifically apply to such relevant product types and functions.
2. Key Features
A. Sales Principles
The FCPA requires financial product sellers to adhere to the following six basic principles in conducting their sales activities (the “Sales Principles”):
- Principle of Suitability (Article 17)
- Principle of Appropriateness (Article 18)
- Duty to Explain (Article 19)
- Prohibition of Unfair Business Practices (Article 20)
- Prohibition on Improper Solicitation (Article 21)
- Prohibition on False/Exaggerated Advertisement (Article 22)
Sellers violating the Sales Principles will be subject to fines; and if a financial consumer incurs loss from a seller’s failure to fulfill its duty to explain a financial product, the seller will have the burden of proving that such failure was not the result of its willful misconduct or negligence (Article 44).
B. Expanded Consumer Protection Rights
Now that the FCPA is in force, financial consumers have the right to a cooling-off period during which they will be permitted to withdraw their subscriptions for certain financial products for any reason (Article 46). Under the FCPA, consumers also have the right to claim for cancellation or nullification of a financial product agreement on grounds of illegality (Article 47) where it is discovered that the financial product seller breached the Sales Principles (excluding prohibition of false/exaggerated advertisements) in selling the financial product. In addition, financial product sellers are required to comply with a consumer’s requests to review data/materials and for provision of copies of such data/materials for the purpose of enforcing the consumer’s rights or seeking remedies for its infringed rights (Article 28).
C. Requirements for Internal Control Standards for Protection of Financial Consumers
To ensure their compliance with the FCPA, financial product sellers must establish (i) a system of internal controls that stipulate the standards and procedures with which their officers, employees, financial product sales agents and brokers must comply in conducting financial product sales (Article 16), and (ii) a set of Financial Consumer Protection Standards, which are standards and procedures with which their officers and employees must comply to prevent financial consumer complaints or provide prompt follow-up relief to protect financial consumers (Article 32).
D. Improved Financial Dispute Mediation System
The FCPA restructures the financial dispute mediation system that was previously implemented by the Financial Supervisory Service, such that courts may suspend proceedings of a lawsuit in progress on a case for which mediation has been requested, until such time that the mediation is terminated (Article 41). In the case of a small dispute in which a financial consumer has applied for mediation, financial institutions/companies cannot file a lawsuit until the mediation process ends (Article 42).
3. Sanctions
The FCPA significantly strengthens the monetary sanctions that may be imposed for violations of financial consumer protection (Article 57). For example, if a financial product seller violates any of the duty to explain or prohibitions against unfair business practices, improper solicitation, or false/exaggerated advertisements, a penalty amounting up to 50% of the gains earned from the contract relating to the violation may be imposed.
Ultimately, it remains to be seen how effective the FCPA will actually be in protecting financial consumers’ rights. Nonetheless, now that the FCPA is in force, financial institutions/companies should make every effort to ensure that they are complying with the Sales Principles by reviewing and updating their internal regulations and organizational structures to align with the consumer protection requirements under the FCPA.
1) The KIKO debacle refers to widespread lawsuits brought against the Korean banks by mostly export-oriented Korean SMEs to nullify certain currency hedging derivatives contracts under which such SMEs incurred crippling losses. The key issues in the lawsuits were whether Korean banks complied with the principles of suitability, appropriateness, and duty to explain.
