On October 28, 2020, the Financial Services Commission (the “FSC”) released a proposed enforcement decree (the “Proposed Enforcement Decree”) to the newly enacted Financial Consumer Protection Act (the “Act”), which is scheduled to become effective on March 25, 2021.  The public comment period on the Proposed Enforcement Decree ended on December 6, 2020.

The Proposed Enforcement Decree contains implementing provisions for the Act mainly in the areas of (i) scope of financial products and sellers subject to the Act, (ii) registration requirements for sales agents/brokers of financial products, (iii) internal control requirements for financial institutions, and (iv) detailed requirements on the six principles for sale of financial products.  In addition, conditions for the right to withdraw subscriptions and the right to terminate contracts and punitive penalty surcharge, which are newly being adopted by the Act, are detailed in the Proposed Enforcement Decree. 

Below are key aspects of the Proposed Enforcement Decree. 

1.   Application of the Act 

All financial products that are classified as deposits, loans, investment products and insurance products are subject to the Act.  As a result, financial products offered by credit unions, P2P lending firms and registered credit service providers will also be regulated by the Act.
 

2.   Entry Requirements for Sales Agents/Brokers

Under the Proposed Enforcement Decree, sales agents/brokers intending to provide their services online rather than in-person will be subject to more stringent conditions for registration such as installation of algorithmic programs designed to prevent conflicts of interest with consumers and establishment of deposit funds to be used towards compensation for customer losses.

Independent financial advisors will be subject to registration requirements similar to those applicable to investment advisors under the Financial Investment Services and Capital Market Act. 
 

3.   Internal Control Requirements for Consumer Protection

Sellers of financial products will be required to have the following internal control structures in place: 

• Authority and responsibilities of decision makers such as the representative director or a director in the implementation of internal control measures;
• Organizational structure and personnel in charge of consumer protection matters, including establishment of a financial consumer protection committee;
• Inter-departmental consultation procedures for development and sale of financial products, process for deliberation and incorporation of outside opinion, standards for vetting advertisements, mandatory training requirements for officers and employees and their qualification requirements, standards for prevention of conflicts of interest, management of confidential information, and disclosure obligations when potential harm to consumers arises; and
• Standards for performance-based compensation of officers and employees in charge of sales.

In addition, those who directly sell financial products to consumers must include in their internal control standard measures to ensure that their sale agents and brokers, in addition to their own officers and employees, comply with applicable laws, regulations and internal control standards.  If the seller’s internal review, the regulator’s assessment of financial consumer protection or audit upon the seller finds that the existing internal control standards are not effective in managing their sales activities to be in compliance with applicable laws, regulations and internal control standards, then the seller of financial products must include provisions to address such shortcomings in its internal control standards.

4.   Six Principles Regulating Selling Activities 

In order to ensure effective compliance with the principles of suitability and appropriateness when selling financial products, the Proposed Enforcement Decree establishes standards for suitability and appropriateness and requires sellers to maintain evaluation reports of whether suitable and appropriate products have been sold to consumers.  Furthermore, sellers of financial products, including banks and securities companies, will now be required to prepare product descriptions themselves so that the sellers will be accountable in carrying out their duties to explain products to the customers. 

The Proposed Enforcement Decree also prohibits sellers of financial products from obtaining exemptions from their customers to comply with the suitability standards or inducing consumers to manipulate their information.  It also establishes and reinforces regulations on advertisements, such as prohibition on misleading consumers to represent sales agents/brokers as direct sellers, and engagement in monopolistic activities, including demanding excessive fees or forcing direct sellers to delegate sales of financial products to certain sales agents/brokers.  Furthermore, sellers will be required to promptly disclose to consumers  any potential violations of law or potential losses to the consumers they are aware of.  

5.   Right to Withdraw Subscriptions, Right to Terminate Contracts and Punitive Penalty Surcharge 

The right to withdraw subscriptions within the statutory cooling-off period and the right to terminate contracts sold in breach of regulatory requirements will be exercisable by customers broadly across all financial products except where application of such rights may be impossible due to the particular characteristics of the product.  The right to withdraw subscriptions applies to all loan and insurance products, as well as investment products such as non-monetary trust contracts and highly complex funds.  The right to terminate contracts applies to long-term contracts but it must be exercised within one year from the time that the customer becomes aware that the financial product was sold in breach of regulatory requirements.  

Sellers will now be subject to a punitive penalty surcharge up to “an amount that is the purpose of the contract” which would mean that the ceiling on punitive penalty surcharges is equal to the deposit amount  for deposit products, loan amount for loan products, investment amount  for investment products and insurance premium  for insurance products. 

The FSC plans to promulgate subordinate regulations for Proposed Enforcement Decree this December that will provide a detailed guideline on the items that financial companies will need to comply with.