[In-Depth Look] The Core Elements Missing from the Financial Consumer Protection Act

The strengthening of financial consumer protection legislation worldwide has occurred since the 2008 global financial crisis. In 2009, the United States enacted the so-called Dodd-Frank Act, which advanced financial consumer protection, prohibited bailout abuses, established an early warning system for financial risks, and improved executive compensation and governance. Alongside the Financial Stability Oversight Council (FSOC), it created an independent Consumer Financial Protection Bureau (CFPB), thereby introducing a so-called twin-peaked financial regulatory system. South Korea, somewhat later, first saw several financial consumer protection bills proposed in the 18th National Assembly in 2012. However, these bills were only proposals and did not become law until the 20th National Assembly, when a government bill was resubmitted and passed the plenary session of the National Assembly last March, with implementation scheduled for March next year.

Although the enactment of the Financial Consumer Protection Act and the introduction of various systems to safeguard consumer rights came somewhat late, it is a welcome development. However, upon closer inspection, there are many hollow aspects. First, the establishment of an independent financial consumer protection agency is missing. Last year, following financial incidents such as the overseas interest rate-linked derivative-linked fund (DLF) and Lime Asset Management scandals, there were numerous criticisms regarding incomplete sales and poor internal controls at commercial banks, as well as the financial supervisory system’s failure to properly oversee these issues.

The current system, which focuses mainly on policy functions and soundness supervision, makes it difficult to prevent financial consumer harm. The original government bill included provisions to establish a Financial Consumer Protection Agency under the Financial Supervisory Service with independent budget and personnel authority, but this was removed at some point. The second issue is that punitive damages and class action systems, which are often cited as consumer damage relief procedures, were not introduced. Instead of a punitive damages system, the passed bill includes punitive administrative fines and penalties, which is an unusual approach since there is no need to add punitive elements to fines or penalties collected by the government. Punitive elements should have been introduced in the form of punitive damages to strengthen civil sanctions against corporate misconduct, directly contributing to both the prevention and redress of consumer harm. In the same vein, it is problematic that a class action system, which would allow both large and numerous small financial consumers to effectively recover damages, was not introduced.

Third, the burden of proof reversal system was only partially introduced. Regarding the burden of proof for damages claims, it applies only to claims for damages due to breach of disclosure obligations, but not to claims related to violations of the suitability and appropriateness principles, which are more important. Disclosure obligations can be proven relatively easily in practice by leaving handwritten or recorded evidence that key product information was explained or heard. However, the suitability and appropriateness principles concern whether the product recommendation or contract conclusion was appropriate for the consumer, and reversing the burden of proof in these cases would be much more effective for consumer protection.

The damage estimation system was also omitted. Some financial products make it difficult to specify the amount of loss. It is necessary to have a specialized institution evaluate the value or loss of investment products, but this process is time-consuming and costly, making damage compensation difficult. It would be efficient to set certain standards to estimate damages and allow the party disputing the estimate to overturn it through concrete proof. Lastly, the bill lacks a pre-classification system for financial product risk grades and strict separation of sales locations and targets.

All financial products should be classified by risk grade, and accordingly, the sales targets and locations should differ. The bill distinguishes between general financial consumers and professional financial consumers and classifies financial products into deposit-type, loan-type, investment-type, and insurance-type products. These are all prerequisites for risk assessment and strict separation of sales targets. However, the bill does not include provisions for pre-classification of financial product risk grades or separation of sales targets and locations. Since about a year remains until implementation, it is hoped that supplementary legislation will be enacted to ensure the law functions properly.

Baek Juseon, Attorney at Law, Law Firm Yungpyeong

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