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

Applying the same regulations to the same functions

The new legislation establishes a reclassification of both financial products and sales channels.

All financial products and services are reclassified into four categories.

• Deposit category: deposits, savings products, etc.
• Investment category: funds, trusts, etc.
• Indemnity insurance category: life insurance, non-life insurance, etc.
• Loan category: mortgages, credit cards, etc.

All sales channels for financial products are reclassified to three categories.

• Direct sellers: banks, insurance companies, savings banks, etc.
• Sales agents: investment solicitors, insurance agents, credit card and loan sales agents, etc.
• Advisors: investment advisors.

Six major sales regulations

The aforementioned regulations are going to apply in more circumstances than today.

• The principle of suitability, which compels a firm to consider its customer's assets and experience of investing when selling products to him, applies to financial investment products and variable insurance. The new law will apply it to all kinds of financial product.
• The principle of adequacy, which compels a firm to notify customers if products appear to be inappropriate in the light of their personal assets etc., applies to derivatives and securities that are linked to derivatives. It will be extended to loans and indemnity insurance products.
• The duty to explain the details of products and other relevant information on request is at present stipulated separately in the Banking Act, the Capital Markets Act, the Insurance Business Act and the Specialised Credit Finance Business Act. It will now be incorporated into the Financial Consumer Protection Act.
• The prohibition of unfair practices stops firms from violating consumers' rights through coercion when selling financial products. The charging of an early repayment penalty is going to be prohibited if loans have been issued three or more years ago. For personal loans, the law will prohibit anyone from asking a third party to stand as joint surety.
• The prohibition of undue recommendation stops firms from spreading disinformation. This is to be 'tweaked' to ban all cases in which financial institutions provide false or distorted information that is likely to mislead consumers when they ask them to sign agreements to do with financial products.
• The prohibition of false or exaggerative advertisements - no change.

Penalties for transgressions

Consumers are going to be entitled to terminate agreements within a certain period of time when firms have been caught flouting sales principles. A unilateral termination of an agreement is possible if the firm in question cannot provide appropriate reasons.

The regulator will prohibit sales of financial products if it expects massive damages or losses to occur to consumers.

In a "liability for damage" case, the burden of proof is to lie with financial firms. They have to prove that there was no intent or negligence in their failures to provide adequate information.

As we have seen, swingeing penalties are in the offing. In one note that deals with this, the cabinet seems to conflate punitive fines with disgorgement. It writes: "Punitive fines: Up to 50% of income earned by bypassing regulations shall be imposed on institutions for violating the major sales principles." This only pertains to the duty to explain and the three prohibitions.

As for the actual penalties, up to 100 million won (£66,000) can be levied on any firm that flouts the duty to explain and the three prohibitions, while up to 30 million won (£19,783) can be levied on any firm that flouts the principles of suitability and adequacy.

Other additions

The new legislation also includes measures to help consumers make rational decisions and to close various "regulatory loopholes."

• Financial institutions that sell financial products are prohibited from offering advice.
• A legal foundation has been set up to run a council that deals with financial education. The FSC's vice chairman is in the chair.
• Direct sellers are going to bear the responsibility of managing agents and will be subject to penalties if they break regulations.
• Loan sales agents will be subject to government supervision.