The bill on the Financial Consumer Protection Act (the “FCPA”) was passed by the National Assembly on March 5, 2020 and by the Cabinet Council on March 17, 2020. By implementing a regulatory system for each type of financial product and unifying and strengthening regulations on sales of financial products, the FCPA is expected to have a significant impact on overall sales activities of financial companies. As the FCPA enters into force one year after its promulgation (expected to take effect in March of 2021), companies in the related industries should start advance preparation by re-examining their internal control systems (including business conduct or sales related rules). The Financial Services Commission (the “FSC”) is expected to be equipped with lower-level regulations including the Enforcement Decree of the FCPA by two months before the effective date.
The FCPA is expected to have the following major implications:
1. Changes to the legal status of financial companies and financial consumers: It is necessary for financial companies to re-examine the existing legal documents and processes and reflect the newly established provisions of the FCPA, such as (i) financial consumer’s right of withdrawal and right to terminate unlawful contracts, (ii) authority of the FSC to restrict sales activities of financial companies, and (iii) shifting of the burden of proof in case of violation of the “obligation to explain”;
2. Significant impact on sales activities of financial companies: The FCPA applies the principles of “suitability” and “adequacy”, among the so-called six principles of sales of financial products (the “Six Principles of Sales”), to all financial products. In that regard, for instance, financial companies must take into consideration those two principles when structuring various loan products including low credit loans; and
3. Need for re-examination and re-alignment of overall financial product sales process: Given the FSC’s recent stance requiring internal control standards related to protection of financial consumers and holding the management responsible for inadequate internal control over sales of financial products, financial companies need not only to identify areas of improvement by reviewing documents required for sales of financial products and re-examining the sales process for each product, but also to secure budgets therefor.
Set forth below is the summary of the FCPA. Please note that further details will be later published by lower-level regulations such as the Enforcement Decree of the FCPA.
1. Regulation of sales of financial products
(1) Implementation of a regulatory system based on the function of each financial product
Under the existing regulatory system, laws and regulations applicable to the financial institution also apply to the financial products that they sell. To the contrary, the FCPA introduces a regulatory system where the same regulations apply to financial products that serve the same function regardless of which financial institution sells them. To this end, the FCPA categorizes financial products into savings, investment, insurance and loan (Article 3), and sales channels into direct seller, agents/intermediaries and consultants (Article 4). Please note that since the existing scheme still applies to regulations other than those applicable to the sales of financial products under the FCPA, the new categorization above may cause confusion when interpreting.
(2) Extension of application of the Six Principles of Sales
The FCPA extends the Six Principles of Sales, whose application is currently limited to certain financial products such as financial investment products, to all financial products. For your reference, the Six Principles of Sales include: (i) suitability (Article 17); (ii) adequacy (Article 18); (iii) obligation to explain (Article 19); (iv) prohibition on unfair sales activities (Article 20); (v) prohibition on unfair solicitation (Article 21); and (vi) prohibition on false/exaggerated advertising (Article 22).
In order to give teeth to the Six Principles of Sales, the FCPA grants the FSC the authority to impose a punitive fine of up to 50 percent of the revenue generated in violation of such principles and to order prohibition of sales of financial products in certain cases.
2. Protection of rights and interests of financial consumers
(1) Establishment of right of withdrawal and right to terminate unlawful contracts
The FCPA extends the consumer’s right of withdrawal, which is currently applied in a limited scope (mainly to insurance products), to investment and loan products so that consumers can unilaterally withdraw their offers to purchase the relevant financial products within a relatively short time frame. Moreover, the FCPA allows financial consumers to demand termination of contract, in case the financial company violated any of the Six Principles of Sales (excluding prohibition on false or exaggerated advertisement), within a period not exceeding 5 years (Article 47; the specific period will be set forth in the Enforcement Decree).
(2) Strengthening of subsequent remedial measures
With respect to the financial companies’ obligation to explain financial products in particular, the FCPA shifts the burden of proof to the financial companies so that they are exempt from liability only when they successfully prove the absence of intention or negligence in mis-selling financial products (Article 44). In case intermediaries or agents caused financial consumers to suffer damages, the FCPA holds direct sellers liable for such damages because they have relatively better abilities to pay for the damages (Article 45).
As such, financial companies need to break from the convention of requesting documents as a mere formality. Instead, they must properly carry out their obligations to explain financial products and set up detailed procedures for obtaining financial consumers’ confirmation on receipt of such explanation. This will require financial companies to reassess the whole process relating to the obligation to explain and establish procedures strictly complying with the requirements under the FCPA before it takes effect.
3. Other newly established provisions
(1) Obligation to establish internal control standards
The FCPA newly established a provision requiring financial companies to procure internal control standards related to consumer protection, which is expected to enter into force within one year and six months from promulgation of the FCPA (expected to be September of 2021). Since financial companies are currently only obligated to procure internal control standards for “work duties in general” pursuant to the Act on Corporate Governance of Financial Companies, they will need to establish new internal control standards in accordance with the FCPA.
(2) Introduction of financial product consulting business
By establishing the financial product consulting business, the FCPA introduces a new type of business that provides comprehensive consulting services to financial consumers for composition of portfolios and asset management strategies (Article 12). This resolved the problem of lack of regulation of consulting activities for financial products other than those under the Financial Investment Services and Capital Markets Act.
(3) Regulation of loan solicitors
The FCPA categorizes loan solicitors as sales agents/intermediaries, thereby subjecting them to the FSC’ supervision. While loan solicitors are currently supervised in accordance with the administrative guidance of the FSC, as the FCPA allows the FSC to supervise and impose sanctions on them directly, regulation of loan soliciting is expected to get even
This update is intended as a summary news report only, and not as advice. For legal advice, please inquire with your contact at Bae, Kim & Lee LLC, or the following authors of this bulletin:
Young Mo KIM
Hae Kyung SUNG