[Q&A] Confusion on the First Day of the Financial Consumer Protection Act... "It Also Applies When You Make a Single Credit Card"

Confusion Arises Nationwide from the First Day of Enforcement of the Financial Consumer Protection Act on the 25th
Debit and Prepaid Cards Are Not Subject to the Act
Mutual Finance Also Excluded from Application for the Time Being

[Image source=Yonhap News]

[Asia Economy Reporter Kiho Sung] As the Financial Consumer Protection Act (FCPA) came into effect on the 25th, severe confusion arose in the financial sector from the very first day. Employees selling financial products struggled due to system instability and inadequate preparation, and consumer complaints about longer waiting times continued. The FCPA was established to reduce losses incurred by financial consumers who subscribed to unfamiliar financial products such as Derivative Linked Funds (DLF) and Lime Private Equity Funds. Since the enforcement of the FCPA is expected to bring significant changes not only to the financial product sales industry but also to financial consumers investing in these products, confusion is expected to be inevitable for the time being. We have addressed the changes brought by the FCPA and the ongoing controversies in a Q&A format.

-What products are subject to the FCPA?

▲From the 25th, the FCPA applies when subscribing to deposits, loans, funds, insurance, etc., at banks, securities firms, insurance companies, and credit card companies. It also applies when issuing credit cards. Since cash services and revolving credit related to credit card subscriptions are difficult to consider as independent financial products, they are subject to regulation.

However, debit and prepaid cards, which require pre-depositing cash, are excluded as they are judged not to be similar to financial products. They are considered payment methods rather than financial products. NongHyup, SuHyup, and Saemaeul Geumgo, which protect over 20 million people, are exempt from the FCPA because the current law grants regulatory authority to their respective supervisory bodies. This is why mutual finance institutions are pointed out as a blind spot under the FCPA. In the case of credit unions, the Financial Services Commission manages them, so they are the only ones subject to the FCPA.

-Is unconditional cancellation possible with the expansion of the right to withdraw subscription and the introduction of the right to terminate illegal contracts?

▲The right to withdraw subscription allows cancellation within 15 days from the receipt of the insurance policy or 30 days from the subscription date, whichever comes first, for protection-type products. For investment-type products and financial advisory contracts, withdrawal is possible within 7 days from the date of document provision or contract conclusion. For loan-type products, withdrawal is possible within 14 days from the date of document provision or contract conclusion.

The right to terminate illegal contracts requires the contract termination request to be made within one year from the date the illegal fact is known (and within five years from the contract conclusion date). Financial product sellers must notify acceptance or rejection within 10 days of the termination request, and if rejected, the reasons must also be communicated. Additionally, closed-end private equity funds, which previously could not be redeemed early, can now be terminated if sold in violation of the six major sales principles. In cases of simple change of mind, consumers aged 65 or older who were recommended high-risk financial products can withdraw their subscription within 9 days.

-Concerns about business contraction due to fines and punitive surcharges?

▲Fines (up to 100 million KRW) can be imposed for violations of the six major sales principles. These principles include suitability, appropriateness, duty to explain, prohibition of unfair practices, prohibition of improper solicitation, and compliance with advertising. Punitive surcharges (up to 50% of revenue, etc.) can be imposed only for violations of four regulations excluding the suitability and appropriateness principles among the six major sales principles.

The suitability principle prohibits contracts for unsuitable financial products, and the appropriateness principle requires notification and confirmation if a financial product is inappropriate considering the consumer’s assets, etc. The six major sales principles apply to financial product sellers and advisors, so fines or surcharges are not imposed on individual employees for violations.

-What do the suitability and appropriateness principles mean?

▲The suitability principle means that financial companies can only recommend financial products designed to match the consumer’s investment propensity, such as risk-taking or stability-oriented types. The appropriateness principle requires financial companies to notify consumers in advance if the financial product they decide to invest in is inappropriate considering their assets and investment propensity.

Financial companies cannot sell financial products by obtaining a confirmation from consumers stating “I am okay with an unsuitable product” even if the consumer wants a risky product. Recommending unsuitable products through methods such as providing fund catalogs and obtaining confirmation from consumers also violates the suitability principle.

However, if a financial product seller sufficiently explains to the financial consumer that the product is unsuitable for their investment propensity, but the consumer insists on choosing the unsuitable product, the consumer may subscribe after being informed of the unsuitability according to the law.

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