COVID-19 Crisis Followed by Financial Consumer Protection Act... Insurance Companies in a State of Anxiety

Regulatory Amendments Scheduled for March Next Year Proposed One After Another
Insurance Agent Commission Must Be Disclosed When Signing Up
"Understand the Purpose... Sales Decline Inevitable"

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] The insurance industry is already anxious about the Financial Consumer Protection Act (FCPA), scheduled to take effect from March next year. This is because a series of amendments strengthening legal regulations on incomplete sales are being proposed. There are concerns that excessive restrictions could further hamper sales activities, which have already been weakened by the resurgence of COVID-19.

According to the insurance industry on the 31st, legislative efforts to strengthen financial consumer protection and rights through amendments to the FCPA have been gaining momentum since last year’s fallout from the defective private equity fund scandal.

The FCPA primarily stipulates that financial companies violating sales conduct regulations, such as the duty to explain or prohibition of unfair solicitation when selling financial products, may be fined up to 50% of their revenue.

[Image source=Yonhap News]

In particular, the recently proposed amendments to the FCPA contain provisions that could directly impact the insurance industry.

The key point of the amendment, introduced by Representative Jeon Jae-su of the Democratic Party on the 13th of last month, is the introduction of a 'punitive damages system' allowing consumers to claim compensation up to three times the amount of damages if consumer harm occurs due to illegal acts by sellers (financial companies). It also shifts the burden of proof for damages to financial product sellers and requires agents and brokers to disclose sales commissions.

If consumer harm arises from incomplete sales, insurance companies must prove that no illegal factors were involved in the sales process. This will inevitably make insurance subscription procedures, such as direct signatures or recordings, more stringent, which the industry argues will become another barrier to insurance enrollment.

The requirement for insurance planners and General Agencies (GAs) to disclose sales commissions and fees to consumers is also seen as a burden by the industry. An insurance company official lamented, "If sales commissions, which have not been disclosed to consumers or outsiders until now, are exposed, the income of planners may be unintentionally revealed, and the insurer’s sales strategies could be fully exposed."

Representative Yoon Chang-hyun of the United Future Party has introduced an amendment imposing liability for incomplete sales compensation on GAs. This assigns primary compensation responsibility to planners if they cause financial harm to consumers during insurance solicitation.

There is a positive outlook that this could eliminate the practice of some GA-affiliated planners offering only high-commission products instead of suitable insurance products to subscribers.

However, given that most GAs are single-person or small to medium-sized firms, it is uncertain whether compensation will be effectively enforced. As of September last year, out of 4,477 total GAs, 4,290 were small to medium-sized with fewer than 100 planners. There are also over 25,000 individual agencies. This suggests that effectiveness could be limited.

An insurance industry official said, "While we agree with the intent to strengthen consumer protection, excessive burdens could arise at a stage where insurance sales channels are not yet mature. With the resurgence of COVID-19 making normal business activities difficult, regulatory measures from the National Assembly could further shrink management activities."

[Image source=Yonhap News]

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