In 2011, several saving banks of Korea had been bankrupted and it shocked Korean society. among these banks, Busan saving banks caused a lot of financial victims. Especially people who had bought subordinated bonds of the bank without any notification of risk of the bonds. This kind of event was not the first time in Korean financial market. From the beginning of 2000, There were various conflict between consumers and financial companies on the issue, incomplete and illegal sales of financial products. The most representative examples is incomplete sales of KIKO(Knock-In, Knock-Out) by banks to middle and small size companies. Both events drew public sympathy and necessity on consumer protection methods for financial consumers. To improve and change this repeating situation of the market, Financial Services Commission(FSC) presented a plan to establish Financial Consumer Protection Act on 17th of November, 2011.
Necessity of Financial Consumer Protection Act
Limitation of current supervising system
Under current financial supervising system, Sole supervising institution, Financial Supervisory Service(FSS) controls both financial institutions’ soundness and customer protection from financial frauds. If these role of the supervisory service works well, There would be no problem but in reality, These two functions are not balanced. Especially right after global economy crisis in 2008, the supervisory service choose to more focus on checking soundness of financial market. In other words, customer protection couldn’t be well handled. too much work for FSS caused the unbalanced operation of their functions.
For more, based on current regulation system, the regulations for each type of financial institution(banks, savings banks, insurances, etc) are separately operated. For example, regulations on saving banks and that on banking services are quite different. On the law of saving banks, there is no mention on obligation of financial company to explain detains of products to consumers which is already written on the law of banking services. This has caused serious problem like the conflict between authorities and consumers after Busan savings bank bankrupted. Busan savings bank had no duty to explain about subordinated-bond as they sold the products to consumers under the law of saving bank. This induced serious financial problems to consumers who just had chased high profit rates relying on the saving banks promotion slogan not detail explanation. After this event, financial authorities have felt the necessity of establish the new and integrated consumer protection law.
International flows on financial consumer protection
Through former global financial crisis, both external and internal financial authorities have re-recognized on the importance of consumer protection. United States , Australia, United Kingdom, Japan and some other countries are now focusing on consumer protection. This kind of flows has been more strong after G20 summit in Seoul, 2011 where countries have agreed upon improvement of consumer protection systems.
The most active countries on building the strict protection law are US and UK. those had established and now are operating distinct financial consumer protection institution.
Main Frame of Financial Consumer Protection Law
1) Information on the products Supporting
In the first phase, the regulator should support consumers by presenting sufficient information so that the authority expect consumers to protect themselves from incomplete sales or frauds. to prevent consumers’ financial damage, financial products consultation service can be good channel for suggesting consumer information on personal asset management.
2) Purchasing Products by Consumers
In the second step, whatever products sold, the law and regulation should screen all of factors which would be related to incomplete sales so that the regulators can abolish the arbitrage profit of financial institutions from vagueness of the regulation.
3) Aiding consumers
When consumers get harmed financially by financial companies illegal, incomplete activities, FSS is in charge of dealing with solving the problems and conflicts. for the last phase, binding power of dispute settlement process would be hardened.
Details of Financial Consumer Protection Act
1. Classifying financial products and companies’ activities based on functions
To make concrete regulation system for consumer protection, FSC and FSS are going to re-sort financial products and companies’ activities based on their functions. Regarding products, both authorities would reorganizing all financial products and services which are served by financial companies into four parts. Furthermore activities of financial companies can be re-classified into several parts. Through this resorting process, the authorities expect to screen and regulate any incomplete sales factors as financial products and services are sold by companies.
2. Regulations on financial product sales
The main factor of this articles is that financial service company should consider consumer’s financial status. This is called principles of suitability and propriety on sales. As the financial company try to sell product to consumer, crucial point companies have to consider in this progress is to check consumer’s status such as credit rate, asset status, etc. For more, when consumer’s choice seems quite not adequate to his/her financial situation, the service company should let him/her know that is not proper.
Restrictive sales by financial companies would also be banned under the article. For example, the banks frequently suggest consumer who is willing to get some credit from the bank to make contract on the other specific products that is not directly related to the loan service by alluring consumer presenting low interest rate of loan service consumer willing to get.
3. Establishing Authorized Financial product consultation(advisory) service
Under the current financial regulation, consultation by un-authorized agency on financial products excluding financial investment products is not banned. to take arbitrage on this situation, some agencies(e.g. insurance agency) are offering consultation service to consumers and then taking commission per contract. The problem on this system is that the agencies are trying to sell the products which would be profitable for them not for consumers since there is no strict regulation on the agencies’ selling activities.
To fix this problem, the authorities are going to add the new business sector, Financial Product Advisory Service that would be under the regulation on the article to make the service be regulated strictly. FSC expects to present consumers new channel for receiving authorized general asset management service which would be faithful comparing to current agencies’ system.
To be an adequate consultation company, the service operator should prevent confliction of interest by opening names of financial companies that have relationship with the advisory service operator to public. And also, when the operator suggest products, it has to compare several products which seem equivalence to the product suggested.
4. Guarantying damage compensation responsibility
Financial giant as employer of agents should declare clear responsibility when the agents provoke financial problems to consumers. In other words, financial company has obligation to deal directly with their employees, the agents. under this regulation, when monetary loss occurred to consumers thorough illegal sales by the agents, not only the agents but also employers who have contract with the agents have responsibility of redemption on consumers’ damage. The range of responsibility and redemption has to be clear to consumers under the new consumer protection law.
5. Establishment of financial consumer protection institution under FSS
The authority considers to build the new institution (Financial Consumer Protection Institution) which takes full responsibility for financial consumer protection under FSS. Even though this organization would be under the control of FSS, it is fact that the agency would have more enforced right for personnel, budget and other activities such as investigation than before.
The role of this organization is mainly settling financial conflicts, educating financial market to consumers and dealing with consumers’ claims on financial companies. For more detail research on conflict and claims, the institution has rights to investigate financial companies. After the process where several problems detected needed to be bettered has done, the director of the institution can demand appropriate follow-up measures to FSC and FSS.
To make the new regulation regarding consumer protection strict, FSC can charge not only penalty fee but taking injustice profit earned though illegal actives back to consumers.
6. The others
FSC has responsibility to establish and operate financial consumer protection policies. And also the authority should take financial consumer education service as its obligation. FSC’s role on the education process is to serve education to consumers for leading them to make right choice whenever consumers face financial products and services. to let this role more solid, FSC would establish financial education committee under the collaboration with professions, financial organizations.
Kyoungmin Kim (email@example.com)