[Opinion] Reflections on Loan Regulations... Samnyeongogae and the Principles of Suitability and Appropriateness

Seong Hee-hwal, Professor at Inha University School of Law

When an old man fell at Samnyeon Gogae, he worried that he would only live for three more years and began to languish. However, by cleverly reversing the curse of Samnyeon Gogae and continuously rolling down the hill, he lived a long life like Dongbangsak who lived for three thousand years. This famous folktale, which I heard as a child while tapping my knee, recently came to mind overlapping with the principles of suitability and appropriateness being applied in reverse in loan regulations. While the reversal of the Samnyeon Gogae curse into a blessing is welcome, the reverse application of the suitability and appropriateness principles?which should serve as a shield for financial consumers but could become a spear for banks?will not be welcomed.

On October 26, the financial authorities announced the "Strengthened Household Debt Management Plan," stating that from January next year, they will check compliance with the suitability and appropriateness principles under the Financial Consumer Protection Act (hereinafter ‘FCPA’) when handling household loans and impose fines or other measures if violations occur. Additionally, the Korea Federation of Banks was asked to review and improve related documents and screening procedures for household loan handling. Accordingly, the banking sector plans to form a task force to revise the model guidelines on loan suitability and appropriateness, including expanding supporting documents.

The suitability principle under the FCPA means that to protect financial consumers lacking risk tolerance, sales recommendations should be made only for safe products that match the consumer’s repayment ability. This principle does not apply if the customer does not want a sales recommendation. The appropriateness principle requires that for risky products such as derivatives, even if no sales recommendation is made, the customer’s purchase request should not be accepted without prior customer understanding and risk disclosure. These are dual safety measures for consumer protection. Initially introduced when the Capital Markets Act was enacted, it later passed through the Insurance Business Act and now applies as a general principle to all financial companies under the current FCPA.

While acknowledging the inevitability of the authorities’ response given the household debt scale exceeding 1,800 trillion won?surpassing GDP?and its rapid increase, it is difficult to agree with the use of suitability and appropriateness principles in loan regulations for several reasons.

First, applying the suitability principle to loan products is theoretically inappropriate. General financial products are sold under the same conditions to the general public, so many unspecified individuals face the same risks, necessitating legal protection. However, loan products have conditions fixed through specific loan contracts, so terms inevitably differ for each contract, and consumers become sufficiently aware of the product during contract negotiations, making indiscriminate product purchases unlikely. The absence of sales conduct regulations like the suitability principle in banking laws governing banks?whose main business is loans and deposits?reflects this reasoning.

Second, applying the appropriateness principle is even more inappropriate than the suitability principle. As explained above, the appropriateness principle is intended to protect consumers from highly risky products. However, the products subject to the appropriateness principle under the FCPA are loans secured by housing, securities, or intellectual property rights, which are among the safest loan products. This sharply contrasts with investment products, where the principle applies only to derivatives and high-level financial trust contracts.

Third, requiring additional supporting documents beyond existing loan documents as a means of customer identification poses significant problems. The most important customer investigation under the suitability and appropriateness principles has so far been conducted through interviews and questions based on verbal information provided by customers, as stipulated by law. Requiring various supporting documents now would cause great inconvenience to consumers and lead to excessive privacy invasion and restrictions on basic economic activities. This could be exploited as a means for banks to refuse loans, contrary to the law’s intent to protect customers from banks.

For these reasons, the use of suitability and appropriateness principles for loan regulation purposes should be restrained, and excessive regulations such as expanding supporting documents should be excluded.

Seong Hee-hwal, Professor, Inha University School of Law

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