On June 28, 2016, the Financial Services Commission ("FSC") proposed the enactment of the "Act on the Financial Consumer Protection Framework" (the "Proposed Enactment").
The Proposed Enactment seeks to enhance the regulatory power of the Financial Supervisory Service ("FSS") by increasing the maximum amount of administrative fines that can be assessed, and by allowing the FSS to estimate damages suffered by financial consumers.
Below we highlight five notable features of the Proposed Enactment:
1. Financial Consumer's Right to Terminate or Revoke Financing Contracts Introduced
The Proposed Enactment provides financial consumers with the right to revoke certain financing contracts.1 Such right can be exercised by providing a written notice to the seller of the financial product (including persons licensed as a broker or agent for selling financial products pursuant to other finance-related laws) within 14 days after receiving the loan. This revocation right is intended to provide financial consumers the opportunity to reconsider the need of incurring debt, and to seek optimal financing solutions.
In addition, financial consumers may provide a written request to terminate a given financing contract within 5 years of its execution, if the seller committed mis-selling. Permissible examples include failure to provide adequate explanations, unlawful solicitation, or unfair marketing practices regarding the financial product sold.
2. Remedies for Financial Consumers Expanded
The Proposed Enactment allows financial consumers to seek remedies during dispute mediation and lawsuit proceedings by securing the consumers′ rights to receive, access, and listen to copies of the materials held by financial companies.
Furthermore, for dispute mediations involving claims of less than KRW 20 million, the Proposed Enactment prevents financial companies from separately filing another lawsuit related to the dispute mediation until such mediation is concluded.
For cases that involve claims of KRW 20 million or more, the Proposed Enactment allows courts to issue suspension orders for the lawsuit proceedings in the event that such proceedings are conducted simultaneously with the dispute mediation procedure.
Regarding lawsuits for damages related to mis-selling, the Proposed Enactment partially shifts the burden of proof to financial companies – companies are required to prove that they did not commit gross negligence or willful misconduct in light of suitability and appropriateness of the financial product sold, and their obligation to provide adequate explanation thereof.
3. Regulations and Sanctions Related to the Sales of Financial Products Expanded
The Proposed Enactment strengthens regulations related to the selling of financial products, and increases the level of sanctions that can be imposed on financial companies for violating such regulations.
The Proposed Enactment requires the application of the principles of suitability and appropriateness with respect to the financial product sold, even for loan-type products.
It also expands the seller's obligations to notify and explain, as well as the scope of unfair sales activities that are prohibited. A financial company may be subject to an administrative fine of up to 50% of its revenues that was generated from engaging in sales activities that are in violation of the Proposed Enactment, and the financial consumer may also terminate the relevant contract.
Additionally, the FSS may prohibit the sale or solicitation of certain financial products, if such a sale or solicitation can result in monetary damages to financial consumers.
4. Pre-Sale Disclosure Obligations to Financial Consumers Expanded
The Proposed Enactment expands the scope of information that must be provided to financial consumers in the sales of financial products.
Under the Proposed Enactment, the FSC may make information publicly available, in which the regulator compares the major terms of financial products in each category.
The FSS may evaluate individual financial companies′ status regarding consumer protection, and may publicly issue its findings.
Furthermore, financial companies are obligated to inform financial consumers of any compensation (including commissions and remunerations) that the seller of the financial product paid out to sales agents, brokers, and consultants in connection with the sale of financial products.
5. Regulatory Requirements for the Sale of Financial Products Now Classified by Product Function (4 Types)
The Proposed Enactment classifies financial products and their services into four types according to their practical functions.
Specifically, these four types are: (i) deposit-type products (products that guarantee the principal investment amount, such as time deposits); (ii) investment-type products (products that do not guarantee the principal investment amount, but generate return on the investment); (iii) insurance-type products (products that pay out insurance payments for certain insured events after the policyholder have paid insurance premiums for a long period); and (iv) loan-type products (a financial company provides a loan and the borrower repays the principal amount of the loan and accrued interest thereon).
The Proposed Enactment prescribes a different set of regulations for the sale of each type of financial product based on several factors, including the principles of suitability and appropriateness for each relevant financial product, explanatory obligations, and regulations on advertisement.
1. The enforcement decree of the Proposed Enactment will set out the applicable financing contracts, which will include loan contracts
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.