The Financial Consumer Protection Act (the “Act”), which was enacted on March 24, 2020, became effective as of March 25, 2021, except for the provisions on internal control, which will become effective as of September 25, 2021.
Following this enactment, the financial regulators have announced draft proposals of the Act’s subordinate regulations, including the Act’s Enforcement Decree, Supervisory Regulations and Enforcement Rules to the Supervisory Regulations, which revealed the statutory and regulatory landscape that will govern consumer protection within the financial industry going forward. We summarize below some of the key takeaways of the Act and the impact on financial companies.
1. Timeline for Reviewing Sales Channel and Implementing Internal Control Standards Bifurcated
The Act requires financial companies to set up internal control standards for financial consumer protection purposes. However, since the Act provides a six-month grace period for this requirement, financial companies must obtain board approvals to implement their internal control standards by no later than September 25, 2021.
Meanwhile, regardless of whether or not their internal control standards have been implemented, starting from March 25, 2021, financial companies must comply with financial consumer protection measures, which include the “Six Conduct Rules” (Suitability, Appropriateness, Duty to Explain, Prohibition of Unfair Sales Practice, Prohibition of Improper Solicitation and Advertisement Regulations), the right to cancel subscriptions and the right to terminate unfair contracts. Therefore, financial companies will need to conduct a review of their sales channels, which may require financial companies to revise their standard contracts, product prospectuses and standard scripts for explaining financial products to meet the requirements of the Act.
2. Further Guidance Needed for Non-Face-to-Face Sales Channels
As the Act does not provide any explicit guidance regarding the sale of financial products through non-face-to-face channels, there are concerns that the principles intended for regulating face-to-face sales channels may not be adequate for regulating non face-to-face sales channels. For example, the “Suitability Principle” requires the seller only to “solicit” financial products that are suitable to the consumer. However, it is unclear whether displaying financial products on an online platform constitutes “solicitation” that subjects the seller to the “Suitability Principle.”
The financial regulators have announced that they will address such uncertainties by operating a “Financial Consumer Protection Act Preparation Team” that will provide guidance on the interpretation and application of the law, and on February 18, 2021, they issued their first FAQs regarding the Act. In addition to these uncertainties, financial companies may need to consider the time needed to implement such guidance into their non-face-to-face sales channels.
3. Supervision and Management Requirements Regarding Sales Agents and Brokers Strengthened
In cases where a financial company delegates its sales activities (including the execution of sales contracts) to sales agents and brokers, the Act will hold the financial company liable for any violations committed by its sales agents or brokers, unless the financial company has properly supervised and managed them. The Act also requires financial companies to apply the same level of internal control standards to its sales agents and brokers that it would apply to its own officers and employees.
Therefore, financial companies that engage sales agents and brokers may need to establish supervisory and management-related policies, and examine whether their existing sales agents and brokers are complying with the applicable laws and regulations.
4. Reorganization of Internal Control Functions Needed
There is some overlap between financial companies’ internal control functions for consumer protection required under the Act and overall internal control functions required under the Act on Corporate Governance of Financial Companies. For some financial companies, such overlap may cause their internal control functions to be managed by multiple departments, resulting in confusion as to which department should be handling which issues, such as advertisements or conflict of interest.
Therefore, some financial companies may need to reorganize and streamline their internal control functions by reassigning personnel, reallocating their budget and redefining roles and responsibilities amongst various departments.
Financial consumer protection has become a hot issue within the financial industry, and with the Act coming into effect, we expect there to be an increase in regulatory investigations, lawsuits, mediations and other forms of disputes arising from this issue. Financial companies will need to check whether they are complying with the various requirements set forth in the Act and its subordinate regulations. However, there are still uncertainties regarding the interpretation and application of the Act. The Financial Services Commission has recognized these uncertainties and has decided to use the first six months following March 25, 2021 as a period to provide further guidance to financial companies and financial consumers. Therefore, during the grace period, financial companies will need to closely monitor the regulators’ guidance and update their internal policies and practices to minimize legal risks.