Introduction of Punitive Damages and Abolition of Securities Transaction Tax... Financial Pledges Gain Momentum Amid Ruling Party's Landslide Victory? (Comprehensive)

Ruling Party Secures 180 Seats, 60% of Parliament, Likely to Gain Momentum for Financial Pledges

On the 13th, two days before the general election, the National Assembly Secretariat is unveiling the badges for the 21st National Assembly members. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporters Haeyoung Kwon, Jihwan Park, Minyoung Kim] With the emergence of a 'super ruling party' holding 180 seats in the 21st National Assembly, it is expected that the financial sector will rapidly advance policies focused on consumer protection. This comes amid public opinion calling for swift measures 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 a consumer class action system 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 sparked controversies over incomplete sales last year. They also promised to promote a class action system. 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 with the same type of damage, 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, despite their good intentions to protect consumer rights, could significantly stifle corporate activities.

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, and mainly restricts financial affiliates from 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, lending companies may hesitate to provide loans to low-credit borrowers, pushing them into illegal private loan markets.

◆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 and the United Future Party previously 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 the burden of capital gains tax, as taxing transactions conflicts with the fundamental taxation principle that 'tax is imposed on profits.' 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 than Korea, the competitive disadvantage is acknowledged.

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 investor effectively has a 14 million KRW loss, but currently must pay dividend income tax (15.4%) on the 10 million KRW gain, which is considered unfair. 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 expanded 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 relatives as of the end of this year, the holder is 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. The individual major shareholder threshold, which was 1 billion KRW until the end of last year, has been significantly lowered.

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. In particular, actively considering a capital gains tax rate below 10% is necessary."

◆Will the amendment to the Internet-only Bank Act pass in the April extraordinary session?＝ Attention is also focused on whether the amendment to the Special Act on the Establishment and Operation of Internet-only Banks (Internet-only Bank Act) will pass in the April extraordinary session of the National Assembly, which opens on this day.

The ruling and opposition parties promised to handle the Internet Bank Act, which was rejected in the plenary session on the 5th of last month, in the next session. The core of the amendment is to delete the disqualification clause related to violations of the Fair Trade Act (fines or higher) when reviewing the eligibility of major shareholders of internet banks.

If the amendment passes, KT, which has a history of violating the Fair Trade Act, could become the largest shareholder of the internet bank K-Bank, opening the way for K-Bank to raise capital through a paid-in capital increase.

Despite the pre-election promise by both parties to handle the amendment, its passage in the plenary session remains uncertain. If the Democratic Party does not adopt the amendment as a party line and leaves it to individual lawmakers' discretion, approval in the plenary session cannot be guaranteed.

Meanwhile, BC Card, a KT subsidiary, has decided to acquire 10% of K-Bank shares held by KT and participate in K-Bank's paid-in capital increase. The scenario is that BC Card will purchase up to 34% of K-Bank's shares and become the largest shareholder. This is interpreted as a preparation in case the Internet-only Bank Act amendment ultimately fails to pass the National Assembly. Earlier last month, K-Bank recruited Moonhwan Lee, a former BC Card CEO, as its president.

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