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More protection on horizon for South Korean investors
Chris Hamblin
3 April 2020
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: 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. "Consumer remedies" in conflict resolution and litigation No financial firm will be allowed to issue a writ for 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. 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. All sales channels for financial products are reclassified to three categories. Six major sales regulations The aforementioned regulations are going to apply in more circumstances than today. 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."
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.
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.