Banks wary of toughened customer protection law

Financial Supervisory Service Governor Yoon Suk-heun speaks during a National Assembly plenary session on Yeouido in Seoul, Feb. 17. Yonhap

By Lee Min-hyung

Korean financial firms are growing nervous about a planned introduction of a customer protection act, amid concerns that the new law may weaken their sales activities and add more confusion when they communicate with customers to settle disputes.

Under the Financial Customer Protection Act, the Financial Supervisory Service (FSS) plans to step up its monitoring of banks and securities firms and slap stronger penalties on those found to have engaged in unfair marketing activities and false or exaggerated advertisement. The act will take effect from Friday.

The act appears to be a step in the right direction, as it comes at a time when banks and investment firms here face sanctions for their mis-selling of some fund products last year. The nationwide financial scandal raised the need for stricter regulations to protect customers.

Mis-selling refers to a sales practice in which a product or service is deliberately misrepresented or a customer is misled.

But commercial banks are crying foul over the act, saying that they are prevented from engaging in marketing activities out of fear of fines of up to 50 percent of their sales when they violate the law. Starting on Friday, any sales worker is also vulnerable to a penalty fee of a maximum of 100 million won ($88,400) for mis-selling financial products.

Financial industry officials here voiced a concerted view that the introduction of the act would add more unnecessary workloads, and customers may also have to endure inconveniences when signing up for financial products.

“The act forces financial firms to explain every single detail of their sales products to customers, but the process will be too time-consuming both for sellers and consumers,” an official from a major commercial lender said Monday.

“For instance, those who have made regular investments and are well-informed about fund products do not have to take time to listen to such detailed explanations, but they have to do so anyways,” the official said.

The act is also expected to increase the work burden on banks and other financial firms, according to the official.

“The FSS has so far dealt with complaints from customers over products sold by financial firms, but each commercial bank has to take on the role under the act, which will increase the burden on banks,” the source said.

Another official from the banking industry remained cautious over the implementation of the act.

“There appears to be much to be revised over the act due to any possible discord between financial firms and customers,” the official said. “For now, the bank industry is still taking a wait-and-see attitude. My view is that it will take some time before the act generates tangible and stable outcomes in terms of enhancing customer protection.”

The securities industry here also raised concerns over the issue of consumers raising unreasonable complaints, as financial firms hold the responsibility for verifying whether their sales activities are in line with the act when customers lodge complaints.

An official from a local securities firm said the introduction of the act will add more confusion in the event of a dispute.

“When a customer raises a dispute over the potential mis-selling of any financial product, its seller should be in charge of demonstrating whether their sales are fair or not,” the official said. “But the current guideline of the act remains vague, so chances are unreasonable consumer complaints may increase.”

Financial firms are moving to hire former financial bureaucrats as their outside directors amid heightened concerns over regulations from watchdogs.

Last week, Samsung Securities decided to appoint former Financial Services Commission Chairman Lim Jong-ryong as the firm's non-executive director during a regular shareholders' meeting. As Lim served as a top financial bureaucrat at both the regulator and the finance ministry, the company expects Lim to enhance communication with watchdogs.

Hyundai Motor Securities also approved of an agenda to appoint Yoon Seok-nam, former accounting service director at the FSS, as the firm's non-executive director, during its recent shareholders' meeting. The company also reappointed Son In-ok, ex-vice chairman of Fair Trade Commission, as the outside director.

“Financial firms prefer top-ranking ex-bureaucrats or those in the legal circles for their non-executive directors amid widening regulatory uncertainties here,” a financial industry source said.