Will the Birth of the 'Super Ruling Party' Boost Momentum for Punitive Damages and Class Action System?

Ruling Party Secures 180 Seats, 60% of Parliament, Accelerating Financial Policy Discussions
Promises Include Punitive Damages, Class Action, and Financial Group Integrated Supervision Act
Focus Also on Abolishing Securities Transaction Tax and Realizing Capital Gains Tax Implementation

[Asia Economy Reporters Haeyoung Kwon, Jihwan Park] With the emergence of a 'super ruling party' holding 180 seats, it is expected that the financial sector in the 21st National Assembly will rapidly advance policies focused on consumer protection. This comes amid public opinion calling for swift action to prevent a recurrence of last year's large-scale consumer damage caused by overseas interest rate-linked derivative-linked funds (DLF) and Lime Fund incidents. In particular, if the ruling party's promises to introduce consumer class action lawsuits and punitive damages become a reality, some predict the market impact could be tsunami-level. In the capital market, the focus is expected to be on revitalizing the stock market, including the phased abolition of securities transaction tax.

◆Will the ruling party hasten the introduction of punitive damages?=The Democratic Party of Korea proposed the punitive damages system as part of its financial policy pledges for the 21st general election. This aims to strengthen financial consumer protection to prevent a recurrence of the DLF and Lime Fund incidents, which caused controversies over incomplete sales last year. They also promised to promote class action lawsuits. The class action system allows some consumers who sue a company and have their damages recognized to extend the effect of that lawsuit to other consumers in the same situation, thereby recognizing their right to compensation. In Korea, it was introduced in a limited way only in the securities sector in 2005. The opposition parties and business circles are concerned that these two systems could significantly restrict corporate activities, contrary to their good intention of protecting consumer rights.

The ruling party also included the enactment of the Financial Group Integrated Supervision Act in its pledges. This system comprehensively manages risks for financial groups combining finance and industry, such as Samsung, Hyundai Motor, and Hanwha, with a key point being restrictions on financial affiliates holding shares in non-financial affiliates. For example, depending on the detailed provisions of the law, Samsung Life Insurance might have to sell its shares in Samsung Electronics.

The Democratic Party promised to lower the maximum interest rate to 20% per annum by revising the Interest Rate Restriction Act to protect ordinary citizens from loan sharking. The legal maximum interest rate for lending has been lowered from 39% per annum in 2011 to 34.9% in 2014, 27.9% in 2016, and again in February 2018 to the current 24% per annum. However, there are concerns that as lending margins shrink, loan companies may hesitate to lend to low-credit borrowers, pushing them into illegal private loan markets as a side effect.

◆Will the abolition of transaction tax and imposition of capital gains tax become a reality?=Attention is also focused on capital market-related election pledges. Both the Democratic Party of Korea and the United Future Party proposed phased abolition of securities transaction tax, imposition of capital gains tax on listed stocks, and offsetting gains and losses from financial investment products such as stocks, bonds, and funds. The abolition of securities transaction tax is intended to reduce the proportion of transaction tax and increase capital gains tax burden, as taxing transactions conflicts with the basic taxation principle that 'tax is imposed on income.' The securities transaction tax was already reduced from 0.3% to 0.25% in May last year, but considering that countries like the U.S., Germany, and Japan have no transaction tax, and China (0.1%) and Taiwan (0.15%) have lower rates, Korea faces competitive disadvantages.

Offsetting gains and losses means calculating taxes by summing all profits and losses from investment products. For example, if an investor incurs a loss of 24 million KRW in Fund A and gains 10 million KRW in Fund B, the net loss is 14 million KRW, but currently, the investor must pay dividend income tax (15.4%) on the 10 million KRW gain, which is considered unreasonable. Countries like the U.S. and the U.K. offset gains and losses on financial investment products and tax only when there is a net gain.

The key issue is expected to be the expansion of capital gains tax. There are concerns that if capital gains tax is significantly increased to compensate for the phased reduction of the annual 6 to 8 trillion KRW transaction tax, investor sentiment could deteriorate sharply. Starting next year, if stock holdings exceed 300 million KRW including direct descendants as of the end of this year, the holder will be classified as a major shareholder and must pay capital gains tax on profits from stock disposals. The tax rates are 30% for holdings under one year and 25% for holdings over one year. This is a significant lowering from the previous major shareholder threshold of 1 billion KRW until the end of last year.

A financial investment industry official said, "Considering the burden on investors during the COVID-19 situation, it is necessary to ease the major shareholder criteria and postpone the introduction," adding, "In particular, it is necessary to actively consider a capital gains tax rate below 10%."

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