Communication Breakdown, Speeding, Populism... Financial Sector on Thin Ice Amid Giant Ruling Party's Restrictive Bill Proposals

Triple Penalty on Financial Firms for Bad Loans
Current Maximum Interest Rate 24% → Proposed Reduction to 10%
Industry Appeals "Excessive Regulation Detached from Reality"

[Asia Economy Reporters Sunmi Park and Minyoung Kim] "The government and political circles call for financial innovation and global capabilities. But the reality is quite the opposite. Strong regulations, rarely seen anywhere else in the world, are increasingly being added. Of course, protecting financial consumers is very important. Financial companies also need to reflect on themselves. However, the logic that all responsibility should lie with financial companies is excessive. Excessive regulations disconnected from reality could shake not only companies but the entire K-finance sector."

Right after the launch of the 21st National Assembly, the ruling party, the Democratic Party of Korea, is intensifying its drive for financial shackling legislation. The ruling party is poised to push through populist bills such as lowering the statutory maximum interest rate, as well as bills that are disconnected from reality or legally problematic. In particular, financial bills aligned with the financial authorities’ emphasis on consumer protection may be processed quickly. The financial sector is worried about the side effects of excessive regulation and is struggling without finding effective countermeasures.

Flood of Financial-Related Bills

According to the National Assembly’s legislative information system on the 18th, on the 14th, Representative Yongwoo Lee of the Democratic Party of Korea introduced a bill to amend the Financial Consumer Protection Act. The bill’s main point is that in small dispute cases involving financial companies within 20 million KRW, if the consumer accepts the Financial Supervisory Service’s mediation proposal, it will have judicial effect regardless of whether the financial company accepts it. Although this is intended to prevent financial companies from delaying by refusing mediation proposals, it is evaluated as an extreme bill that unilaterally restricts the financial companies’ right to sue.

Kim Tae-nyeon, floor leader of the Democratic Party of Korea, is speaking at the floor strategy meeting held at the National Assembly in Yeouido, Seoul, on the morning of the 18th. Photo by Yonhap News.

A bill to punish financial companies that sold insolvent private equity funds more severely has also been introduced. According to the 'Amendment to the Act on the Governance of Financial Companies' proposed by Representative Hanjeong Kim and others from the Democratic Party, a penalty of three times the consumer damage amount will be imposed on financial companies that violate internal control standards and risk management standards. Representative Jaesoo Jeon of the same party also proposed a bill through the 'Partial Amendment to the Financial Consumer Protection Act' requiring financial companies that sold financial products to compensate damages up to three times. By specifically stipulating the responsibility of financial company executives for internal control, financial companies will face the burden of establishing more detailed internal control systems and punitive fines.

An executive in charge of risk management at a commercial bank said, "If the bill proposed by Representative Kim is passed, disciplining the CEO of financial companies will become easier, but financial companies will have to bear the risk of internal confusion," adding, "Changes in governance and internal confusion in the financial sector can lead to a decline in the quality of products and services, which is ultimately bad for consumers in the long term."

Representative Byungwook Kim of the Democratic Party is preparing to introduce a bill related to the introduction of a Fair Fund as a measure to resolve insolvent private equity funds. The Fair Fund system collects fines imposed on financial companies for illegal acts and uses them as relief funds for small investors who suffered damages. Since the Fair Fund is composed and operated from fines imposed on financial companies with issues such as unfair trade and incomplete sales, it opens the possibility of stronger punitive fines on financial companies, as seen overseas. Representative Hakyoung Lee of the same party also introduced the 'Partial Amendment to the Banking Act' to strictly supervise bank management.

Bills ignoring industry realities are also piling up. The current maximum interest rate is 24% per annum under the Loan Business Act and the Interest Limitation Act. Representatives Namguk Kim and Jinseok Moon of the Democratic Party each introduced amendments to lower it to 10% per annum. Moon’s bill also includes provisions imposing imprisonment of up to three years or fines up to 100 million KRW if loan companies exceed the maximum interest rate. Experts evaluate that if the law is amended, credit loans across the secondary financial sector, including savings banks, card companies, and capital companies, will inevitably shrink. The financial authorities also realistically consider this difficult. A secondary financial sector official criticized, "The ruling party’s bills label financial companies that lend within the law as evil while pretending to protect the common people, but in the end, they will be bad laws that push financially vulnerable groups into illegal private loans."

In the insurance industry, the amendment to the Insurance Business Act, commonly called the 'Samsung Life Act,' is a hot topic. Insurance companies can only own stocks of major shareholders or affiliates up to 3% of total assets, and the stock price is calculated at acquisition cost. The amendments proposed by ruling party representatives Yongjin Park and Yongwoo Lee require calculating the value of held stocks based on market price instead of acquisition cost. The market consensus is that Samsung Life Insurance and Samsung Fire & Marine Insurance would have to sell nearly 23 trillion KRW worth of Samsung Electronics shares. This could ultimately lead to losses for insurance policyholders and shareholders and cause significant market shock. Since the financial authorities, which previously took a neutral stance, have officially supported the amendment, the controversy is expected to intensify further.

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