[First Day of the Financial Services Act - Q&A] Signature, Name Seal, and Recording Confirmation Required After Understanding Explanation

10 Must-Know Questions and Answers About the Financial Consumer Protection Act on Its First Day of Enforcement

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[Asia Economy Reporter Park Sun-mi] On the 25th, the Financial Consumer Protection Act (FCPA) will be enforced. With the enforcement of the FCPA, financial consumers will be broadly guaranteed rights such as the right to withdraw subscription and the right to terminate illegal contracts. The banking sector is also increasing vigilance by strengthening employee training to reorganize and prevent incomplete sales. Below is a 10-question 10-answer summary of frequently asked questions from the industry and consumers regarding the enforcement of the FCPA.

Q. What is the scope of the seller’s monetary refund when a consumer exercises the right to terminate an illegal contract?

The right to terminate an illegal contract means that if a financial company violates sales regulations, the consumer has the right to terminate the contract early due to that violation. Since the effect of terminating an illegal contract occurs prospectively, the contract becomes null and void from the ‘termination point’ onward. Usually, consumers bear fees (early repayment fees, redemption fees, etc.) and penalties when terminating a contract, but in the case of an illegal contract, the seller cannot impose costs related to termination on the consumer.

Q. What is the criterion for small-amount dispute mediation?

The FCPA prohibits financial companies from filing lawsuits to avoid dispute mediation, which could cause general financial consumers difficulties in post-remedy. If a dispute mediation amount is 20 million KRW or less and mediation is ongoing, the financial company is prohibited from filing a lawsuit. Article 42, Clause 2 of the FCPA defines the dispute mediation amount as ‘the amount of rights or benefits claimed by the general financial consumer applying for mediation through the mediation process being within 20 million KRW.’ According to the wording of the law, whether a dispute qualifies as a small-amount dispute mediation is judged based on the amount claimed by the consumer at the time of applying for dispute mediation.

Q. Is there a specific guideline for fulfilling the duty to understand the product?

The judgment on whether the duty to understand the product has been fulfilled is based on whether the financial company has established and implemented internal regulations for necessary job training related to individual financial products. The necessary job training items for individual financial products are autonomously determined by the financial company considering the product content and consumer protection policies.

Q. Must the explanatory document be provided in writing?

The seller must, in principle, provide and explain the explanatory document when recommending or upon request by a general financial consumer. The consumer must confirm understanding of the seller’s explanation through signature (including electronic signature), seal, or recording. The enforcement decree of the FCPA stipulates that the explanatory document can be provided by written delivery, mail (including email), text message, or other electronic means of expression. Electronic means include showing the explanatory document content on electronic devices (mobile apps, tablets, etc.).

Q. Are there specific legal regulations regarding the core explanatory document?

To resolve the difficulty consumers face in fully grasping thick explanatory documents, the FCPA supervisory regulations require that a summary of important matters be placed at the front of the explanatory document. The FCPA supervisory regulations specify that the core explanatory document must include ▲features that differentiate the product from similar financial products ▲matters related to possible disadvantages after contract (risk rating, disadvantages in case of principal and interest delinquency, matters requiring consumer understanding due to frequent complaints or disputes, etc.) ▲contact information available for filing complaints or requesting consultations.

Q. What about investment propensity evaluation related to the suitability principle?

The seller must not recommend financial products unsuitable for the customer by judging the consumer’s loss absorption capacity or loan repayment ability based on information provided by the customer. The FCPA stipulates that when the seller judges whether a financial product is unsuitable for the consumer, the seller should comprehensively consider the information provided by the consumer (age, financial status, understanding of financial products, investment experience, etc.). The legal standards for suitability judgment were prepared within a range that does not significantly deviate from existing standards such as the Financial Investment Association’s ‘Standard Investment Recommendation Code’ to enhance field acceptance.

Q. Are financial company employees subject to fines or punitive surcharges?

Fines (up to 100 million KRW) can be imposed for violations of the six major sales principles, and punitive surcharges (up to 50% of revenue) can be imposed for violations of four of the six principles excluding the suitability and appropriateness principles. Since the six major sales principles apply to financial product sellers and advisors, fines or surcharges are not imposed on affiliated employees for violations.

Q. Regarding risk rating evaluation of investment products

According to the FCPA, financial product direct sellers such as banks and securities companies must prepare risk ratings for investment products like funds and include them in explanatory documents. The subordinate regulations of the FCPA specify factors to consider when preparing risk ratings, such as volatility of underlying assets and maximum possible principal loss amount. The risk rating explanation is not significantly different from the content regulated by the existing Capital Markets Act. The risk of financial products composed of multiple funds is evaluated by comprehensively assessing the risk ratings of all constituent funds. In the case of variable insurance and ISA, if the consumer selects funds at the time of contract, only the risk ratings of the selected funds need to be explained.

Q. It is difficult to prepare internal control standards by the enforcement date; what then?

The obligation to prepare internal control standards will be enforced from September 25 this year. Related organizations and executives should prepare internal control standards by the enforcement date and complete necessary procedures such as shareholder meetings and board meetings. To enhance field acceptance, the contents to be included in the internal control standards are mainly based on key items from the ‘Model Code for Financial Consumer Protection’ (Financial Supervisory Service administrative guidance) that have been applied in the financial sector for years. Additionally, each financial industry association plans to establish an internal control standards committee by the first half of the year to prepare ‘Standard Internal Control Standards.’

Q. Does the FCPA apply to Saemaeul Geumgo, Nonghyup, Suhyup, and the Korea Forest Service Cooperative?

Nonghyup, Suhyup, Korea Forest Service Cooperative, and Saemaeul Geumgo are excluded from the scope of the FCPA because the current supervision and sanction system was not reflected at the time of the FCPA enactment. Since October last year, the Financial Services Commission has been reviewing with related ministries the application of the FCPA to Saemaeul Geumgo, Nonghyup, Suhyup, and the Korea Forest Service Cooperative. Currently, related consultations are progressing smoothly, and plans are to prepare and announce measures together with related ministries promptly after the FCPA enforcement.

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