New legislation to protect financial consumers from sharp practice has been approved at a cabinet meeting in South Korea.

The new legislation is in line with the South Korean Government’s policy to make the economy fairer. The Government's stated aim is "to level the playing field between consumers and financial institutions."

A drive to close regulatory loopholes

There are six major sales regulations that apply to selected financial products, which are:
i) the principle of suitability;
ii) the principle of adequacy;
iii) a "duty to explain";
iv) the prohibition of unfair practices;
v) the prohibition of undue recommendations; and
vi) the prohibition of false or exaggerated advertisements.
These will be applied to all financial products.

Firms that contravene the sales regulations will face strict punishments such as punitive fines and 'disgorgement' of up to half the income that they have earned by bypassing these regulations in each case. The Government might impose a sales ban to prevent massive damage to consumers, although nobody knows how this might work.

[Editor's note: Investopedia notes that 'disgorgement' is the repayment of ill-gotten gains by wrongdoers. In the US disgorgement is a remedial civil action and not a punitive action.]

"Consumer remedies" in conflict resolution and litigation

No financial firm will be allowed to issue a writ for
the purpose of leaving a conflict resolution process and avoiding mediation. If there is an unresolved conflict resolution case, a court will be able to decide to halt further legal processes through a stay of proceedings.

The burden of proof in liability for damage cases will be transferred to the seller and consumers will be entitled to the right to request information to be used in conflict resolution cases or lawsuits.

More choice for consumers

Consumers will be entitled to the right to withdraw subscriptions within a certain period of time and may resort to unlateral termination of contracts when violation of sales regulations is found.

Financial firms will be required to impart important information such as the risk levels of investment products and also by law they will have to provide consumers with comparative information about financial products.

We now move on to the main features of the law.