[Viewpoint]KIKO, DLF, and the Lime Incident

Jang Deok-jo, Professor at Sogang University School of Law

According to the claim of Mr. Kim, a victim of incomplete sales, when he went to withdraw his savings from Bank A upon maturity, a bank employee recommended a product with a good interest rate that supposedly had no risk of principal loss, and he subscribed to that product. After one year, when he needed funds and went back to cancel the product, he was unable to redeem it because redemptions had been suspended, and only about 10% of the principal remained.

Such incomplete sales issues have continuously occurred in foreign exchange derivative products like 'KIKO', derivative-linked funds (DLF), and the Lime incident. In these cases, can it be said that the investor Mr. Kim should bear responsibility simply because the 'principle of self-responsibility' is emphasized, and that he should have thoroughly reviewed the related products instead of relying solely on the employee's explanation?

Current Korean law already prohibits incomplete sales practices. This regulation is part of essential financial knowledge that consumers must know to exercise their rights. First and foremost is the 'duty to explain.' Bank A’s employee must ensure that Mr. Kim understands the product details, investment risks, and other important matters during the explanation process, and must not provide false or distorted explanations of significant facts that could affect Mr. Kim’s rational judgment or the value of the product.

Second is the 'principle of suitability.' Before recommending investments to Mr. Kim, Bank A must gather information through interviews about his investment objectives, financial situation, and investment experience, and must not recommend investments deemed unsuitable for him. Third is the 'principle of appropriateness.' Even if Mr. Kim invests in risky products under his own autonomous judgment without Bank A’s recommendation, Bank A must assess whether the investment is appropriate and notify Mr. Kim if it is not.

Fourth, there must be no unfair solicitation. Unfair solicitation refers to acts such as providing false information, making definitive judgments on uncertain matters, or conveying information that may cause misunderstanding of certainty. Bank A violated all of these. The product was unsuitable for Mr. Kim, who expected principal protection, thus violating the principles of suitability and appropriateness; the duty to explain was breached by falsely informing that the principal was guaranteed; and it also constitutes unfair solicitation.

Under current law, sanctions or claims for damages against Bank A’s business conduct are possible. However, a law strengthening the obligations of financial sales entities, including Bank A, was passed by the National Assembly on the 5th. This is the 'Financial Consumer Protection Act,' scheduled to be implemented in the first half of next year. This law includes important provisions related to the 'duty to explain' for consumer protection. To claim that the bank did not violate the duty to explain, the bank must prove that there was no 'intent or negligence.' Generally, the victim claiming damages must prove the perpetrator’s intent or negligence, but in cases of duty to explain violations, the burden of proof is imposed on the financial sales entity.

Additionally, a penalty system related to deterrence has been introduced, allowing imposition of fines up to 50% of the bank’s income earned from contracts related to duty to explain violations or an equivalent amount. Furthermore, the financial dispute mediation system has been improved to reduce the burden on financial consumers.

There are criticisms that the Financial Consumer Protection Act will reduce financial companies’ profits and increase costs. However, given the continuous incidents caused by incomplete sales, strengthening deterrence to effectively protect victims’ rights and prevent recurrence of similar incidents is a measure to support. Lastly, I want to emphasize that financial consumers must make every effort to acquire the knowledge and information necessary to protect their own rights. This starts with understanding the relevant laws and systems.

Jang Deok-jo, Professor, Sogang University School of Law

This content was produced with the assistance of AI translation services.