Over the last two decades, Koreanfinancial service sector has observed a shift from the traditional strong regulatory culture, characterized by a limited new business license and active involvement of supervision system. For example, no new license has been issued in insurance area since 1990s when the US successfully asked for liberalization in Korean insurance market. And the neo liberalism in economic policy has expanded its realm into monetary policy andfinancial policy from the middle of 1990s. It is about that period when the Bank of Korea, the central bank could begin to exercise and enjoy its independent monetary policy freed from government hand. In addition to that, commercial banks, security brokers, and insurance companies were given free marketing options in product development, pricing, ways of promotion, and placement.
One of the driving forces in financial innovation was the development of information technology including internet and mobile phones. Internet has been rapidly expanding in Korea right after the beginning of 21st century thanks to American development, resulting in popularity in internet banking, internet security transaction, and internet purchase of insurance products centering on automobile insurance. Major changes took place in security brokers above banking or insurance sector so that most of the traditional stock brokerage lost its market shares to new internet brokers whereas traditional banks and insurers could slowly adjust their business strategies. Most of those rapid changes may be partially attributable to Korean financial consumers’ culture favoring innovation and speed especially among young generation.
Industry structure of Koreanfinancial service sector can be characterized by an oligopoly system mainly thanks to strong government control of new entry. The system may has helped the captive value of the incumbent companies, not the consumer surplus nor stability of financial system, as we observed the 1997 financial crisis or 2000 credit card crisis in Korea. The strict licensing system could contribute to easy merger and acquisition offinancially troubled companies to some degree as there were no other option to enter the industry than buying those companies.
Table 4 Public spending
Name 2011 2012 2013
Public spending on incapacity Total, % of GDP
0.583 0.614 0.609
SourceKorean Statistical Information Service
One of the great misfortune that Korean economy has had, was the foreign exchange crisis in the late 1997 that prevailed in Asian region which required most of Korean commercial banks to be sold to foreign investors. As a response to shortage of foreign exchange reserve at that time, Korea could not help accepting the proposal of the International Monetary Fund to raise interest rate and to attract foreign capital in a short period. This unusual treatment, which has never been exercised elsewhere in the world since then, had brought many bankruptcies of major industrial companies and consequently commercial banks with non-performing loans to those companies.
After the crisis, which was reportedly overcome very fast but painfully, Korean companies and financial institutions’ financial leverage has dramatically reduced but with a balloon effect increasing the debt ration of household on the other hand.
Introduction of prudential regulation and its strict standards has reduced debt ratios of major Chaebols andfinancial institutions previously holding aggressive growth
Fig. 4 Account holder per bank deposit (A billion won).SourceEconomic Statistics System, The Bank of Korea
Fig. 5 Life Insurance company’s new business (CY’15) (one million won, unit). Source Insurance Statistics Information Services, Korea Insurance Development Institute
policies. Nevertheless, Korean government shifted its growth engine to household consumption by allowing them to borrow more for consumption or investment on real estate, inevitably resulting in credit card crisis in early 2000s and contemporary household debt issues in 2010s. As of 2017, total debt of household amounts to annual Gross Domestic Product level (Figs.4,5,6 and7).
Fig. 6 Non-life insurance major perfomance status (CY’15) (one million won, unit). Source Insurance Statistics Information Services, Korea Insurance Development Institute
Fig. 7 Loss ratio.SourceInsurance Statistics Information Services, Korea Insurance Development Institute
2 Financial Consumer Protection System (Software) 2.1 Relevant Laws and Rules
As in the most of industrialized countries, Korea has introduced various types of financial services and enacted corresponding laws and rules. The laws and rules are too detailed to be introduced here in its entirety, but the recent revisions briefly represented here, show a strong propensity to increase and formalize consumer protection provisions and that the main goals of the laws have changed over the decades along with the development of Korean economy. Previously,finance has played a subordinate role to support economic development in Korea, but more recently, more laws have begun to acknowledge the rights of consumers and the means to protect them.
Currently there is no single general law overseeing all aspects of financial consumer protection.15Rather,financial consumer protection provisions regarding mandatory disclosure requirements,financial education, dispute resolution, etc., are scattered across various sector-based statutes. For example, securities and deriva- tives are regulated by the Financial Investment Services and Capital Markets Act (hereinafter“Capital Markets Act”),16deposits and savings by the Banking Act,17 and insurance products by the Insurance Business Act,18and credit card services by the Specialized Credit Financial Business Act.19 In addition to sector-based acts, specialized statutes stipulate specific aspects offinancial consumer protection such as consumer credit information (including credit ratings),20 and debt collection.21
2.1.1 Banking
All the commercial banks, fully owned and controlled by government up to 1980, used to play a pivotal role in economic development as a compulsory platform of national saving. That is, commercial banks were an official channel to attract savings from household at lower rate than market interest rate or black market rate in order to provide a low rate of commercial loan to major industrialized corpo- rations. And other types of deposit taking institutions were additional banks, or so called savings bank with offering higher lending and borrowing rates than normal banks.
As with change of the Banking law, banks were privatized in terms of ownership as early as 1980s, following global trend offinancial liberalization and internal necessity to foster managerial efficiency, and beginning to liberalize interest rates among banks. As the deposit interest rates were so low, considering inflation rate or economic growth rate, that depositors should in fact sacrifice their wealth to the national economic development or growth of large sized conglomerates.
The privatization and liberalization of banking sector had enjoyed a historic economic boom at the later 1980s to see the economic downturn in the 1990s when Korea celebrated the complete political freedom from military dictatorship and membership of the OECD, which was followed by a economic crisis in the 1997.
After the entire major banks went into insolvency and recapitalized at the end of 1998 crisis, government gave banks more freedom to choose for their management and extra service domain as their business area while solvency regulation got more tightened than before. As a way to support bank’s profitability as well as to meet a global trend offinancial integration, the big brothers in the financial sector were permitted to sell insurance products and investment products one after another. The amendment of banking law for the bancassurance faced no serious difficulty in getting governmental endorsement, partially thanks to banks’ reputational advan- tage over insurance companies in public as well as to dominance in terms of industry size.
The banking law used to stipulate that the banks had been representative ‘fi- nancial institutions’up to year 2010 when the law was amended to include other types of institutions in the FIs category.
Previously, the detailed provisions for financial consumer protection were not stipulated in formal statutes or enforcement rules, but rather, in supervisory guidelines of the FSS, or self-regulatory rules enacted by the self-regulatory organizations. Recently, however, to reflect the surge of consumer protection ini- tiatives that took place in thefinancial sector following thefinancial crisis of 2008, the traditional sector-based laws are incorporating more consumer protection pro- visions. As such, most of the banking sectorfinancial consumer protection statutes introduced here have been stipulated in the Banking Act on or after 2010.
(1) Disclosures and Advertisements
Under the Banking Act, banks are required disclose to their customers, information about thefinancial products and its transaction terms and conditions as prescribed by the laws and regulations. Specifically, a bank is required to disclose, interest rates, matters related to contract termination, deposit insurance and other matters necessary for the protection of consumers.22 Banks are also required to explain details of financial contracts in each stage of a financial transaction as follows:
(i) when soliciting a contract: major terms and conditions of the contract including costs of transaction; (ii) When a bank customer applies for a contract: Standard terms and conditions; when executing a contract: contract documents.23Details also differs depending on the types offinancial services provided (i.e. deposit accounts, loans, derivatives).24
Likewise, when a bank advertises its bank products, it is required to include the name of the bank, details of banking products, transaction terms and conditions.25 A bank shall clearly indicate the scope of interest rates and methods of calculating of them, the timing of paying and imposing interest, additional benefits and expenses, to ensure bank users to make reasonable decisions on banking products.26
(2) Prohibition of Mis-selling
The Banking Act and related regulations prohibit certain unfair bank sales practices.
Specifically, in connection with credit provision, a bank is prohibited from, (i) co- ercing a borrower to purchase bank products, such as deposits contrary to his/her intent, (ii) restricting cancellation or withdrawal of bank products, such as deposits and installment savings, (iii) requesting a borrower or any third person to provide comprehensive collateral security or comprehensive collateral guarantee, without any justifiable grounds, (iv) requesting joint guarantee to a third person who pro- vides security, (v) coercing related persons of a borrower, such as the representa- tive, executive officers, etc. of a small and medium enterprise to purchase bank products contrary to their intent, (vi) selling bank products, in connection with credit transactions, to a small and medium enterprise which is a borrower, or related persons of such borrowers.27
(3) Recent Revisions
In 2016, the Banking Act added new provisions prohibiting unsound business activities,28 and requiring banks to prepare measures such as managing internal controls to prevent financial accidents, protect information of bank users, and making procedures to deal with high- risk electronic transactions, requiring banks to report to the public (i.e. on its website) for high-impactfinancial fraud or accidents.29
2.1.2 Securities
The Koreanfinancial system is traditionally well known for its bank based system.
More recently, the nation has strived to transition into a market based system, which is considered to be more efficient, diversifiable, innovative and has more advanced consumer protection mechanisms.
The now-defunct Securities and Exchange Act (SEA),30which was enacted in 1964 had played a crucial role in regulating the secondary market of securities. The Act stipulated mandatory disclosure requirements for listed companies, and pro- hibited unfair practices such as market manipulation and the use of nonpublic information. However, the SEA was found insufficient to meet the needs to regulate the increasing variety of securities, growth of the primary market, and protect financial consumers in equal footing.
In February 2009, Korea’s financial regulatory structure witnessed a funda- mental change in this landscape as the Capital Markets Act came into effect.
Enacted in 2007 to promote fair market competition, supportfinancial innovation and to introduce systematic and more stringent investor protection, the Capital Markets Act drastically overhauled the regulatory framework of the Korean capital market.31The law was thefirst major initiative with an ambitious vision to create a global size of investment banks in Korea, and to enhance profitability of securities brokers. The following are a brief introduction of representative provisions of the Capital Market Act that are relevant to investor protection.
(1) Duty to Explain and Advertisement Rules
When afinancial investment business entity (hereinafter“Financial Company”)32is making an investment recommendation to an ordinary investor,33 the seller is required to explain, to the investor, the details of thefinancial investment product,34 the risks contingent upon the investment, the structure and characteristics of the investment, the fees, and terms and conditions related to early termination.35 A Financial Company is required to obtain a confirmation from each ordinary investor, stating that he/she has understood such aforementioned details.36
When advertising its financial investment products, a Financial Company is required to, include the name of the company, descriptions of the financial investment instruments, the risks contingent upon the investment, and other mat- ters37 For certain types of investment products (i.e. collective investment securi- ties38), a Financial Company is required to include information in the advertisement to allow the investor to be cognizant of the risks entailed to the investment. Such information includes, a statement recommending that the investor read the invest- ment prospectus before acquiring the, a statement indicating the fact that there is a risk of loss, a statement that the past performance of the collective investment scheme does not guarantee a return on investment for the future.39
Regulations also requires every investment trader or broker to provide contin- uous information to the customer in forms of monthly reports on sales of securities, of the details of monthly trading and earnings and losses, the current status of balance and remaining volume as at the end of each month, the current status of unsettled agreements for derivatives as at the end of each month, the current status of balance of deposited property and the required amount of margin deposit, and other relevant matters.40
(2) Know-Your-Customer and Suitability Rules
The Capital Market Act requires a Financial Company to assess the investor and, make investment recommendations that are suitable to the investor. Specifically, each Financial Company shallfirst (i) ascertain whether the investor is an ordinary investor or a professional investor, (ii) and if the investor falls into the‘ordinary investor’ category, the Financial Company shall obtain information about the investment purpose, status of property, experience in investment, etc. of an ordinary investor through interviews, inquiries, etc. before recommending him/her to make an investment.
In the case of derivatives and other types of high-risk investments, the Financial Company shall obtain information about ordinary investor through interviews and inquiries,41and if the high- risk investment is deemednotadequate for an ordinary investor taking into consideration of the information obtained from the investor, the Financial Company shall notify the investor of that fact.42
(3) Prohibition of Mis-selling and Rules on Conflicts of Interest
Providing false information, misleading information or decisive judgment on uncertain matters, when making an investment recommendation, are prohibited
under the Capital Markets Act.43Unless there is a justifiable ground, promising in advance to compensate, or compensating after the fact, for all or part of losses that an investor may (or has) sustained is prohibited.44
Investment traders and brokers are also prohibited from front-running, that is, a broker or dealer trading in his personal account based on advanced knowledge of pending orders from the clients; or, within 24 h of public disclosure of certain research and analysis data.45 Paying to a person in charge of the preparation of research and analysis, any contingent remuneration in connection to corporate finance, is also prohibited.46
2.1.3 Insurance
Insurance laws in Korea are twofold, thefist being insurance contract law, a body of private law which is incorporated as a chapter in the Korean Commercial Act.47 Insurance contract law deals with the relations between individuals or institutions in insurance contracts by dictating matters on entering into, and interpreting insurance contracts. The insurance contract law provisions have been amended less often than the Insurance Business Act, which has reflected several technological and product innovations that took place in the industry.
Separate from the insurance contract law provisions, is the Insurance Business Act which is a public law directly regulating all the insurance companies’activities, from licensing, capital requirements, dissolution to business conduct regulation.
Although both insurance contract laws and the Insurance Business Act have commonalities in that they pursue consumer protection at a higher level, the latter has been amended to incorporate provisions which have a more direct effect on consumer protection. More recent revisions since 2010 have reflected heightened consumer protection significance and legislative efforts by including provisions such as the duty to explain and suitability rules first introduced in the Capital Markets Act.
The following are a brief introduction of representative provisions of the Insurance Business Act that are relevant to consumer protection.
(1) Disclosure and Advertisement Rules
Insurance companies are required to include in their insurance prospectuses used for solicitation, certain matters such as, (i) the insurance company or agent’s name, (ii) important matters concerning rights and duties of the holder of the insurance contract, (iii) matters concerning on what is being insured under insurance policies, (iv) matters concerning restriction of payment of insurance proceeds, (v) matters on refunds from insurance contract cancellation, (vi) matters concerning depositor protection.48Insurance companies (or persons engaged in insurance solicitation) are also required to explain to the consumer, important matters concerning insurance contracts, such as the premium, scope of coverage, grounds for restricting the payment of insurance proceeds, and other relevant matters to an ordinary policy- holder in an understandable manner.49
The Act mandates certain matters to be included in an advertisement for an insurance contract, such as, (i) details recommending to read a product description and terms and conditions before concluding an insurance contract, and (ii) details stating that insurance underwriting may be rejected, premiums may be increased, or details of coverage may change where a policyholder concludes another insurance contract after cancelling a pre-existing insurance contract.50An advertisement shall not include certain matters such as, (i) misleading the policyholder that he/she may receive insurance proceeds without any restrictions regardless of contractual restrictions on payment or exemption clauses, (ii) misleading a policyholder by emphasizing/exaggerating certain details or introducing example cases in which a policyholder has received a large amount of insurance proceeds or (iii) misleading a policyholder into underestimate the price of premiums by insufficiently explaining the calculation standards of premiums.51
(2) Know-Your-Customer and Suitability Rules, Duty to Verify Dual Contracts Similar to the Capital Market Act, the Insurance Business Act has incorporated suitability rules in insurance contract solicitation by requiring an insurance com- pany to assess the prospective policyholder, and make recommendations that are suitable to the policyholder. Specifically, an insurance company shall,first assess the age and property status of the policyholder, the reason the policyholder buys insurance, and other relevant matters by interviewing or questioning the policy- holder.52 The insurance company is then prohibited from soliciting an ordinary policyholder53to enter into an insurance contract which is deemed inappropriate for the ordinary policyholder in light of the information collected in the aforementioned manner.54An insurance company is also required to verify, after obtaining consent thereof of the policyholder, whether a potential policyholder has entered into an insurance contract which covers the same risk as that to be covered by the insurance contract he/she or it intends to solicit, before soliciting certain insurance contracts.55 (3) Prohibition of Mis-selling and other Illegal Activities
Some examples of acts that are prohibited under the Insurance Business Act in relation to consumer protection, are as follows: (i) providing false information about the details of the insurance contract, or failure to provide important details of the contract, (ii) comparing an insurance contract with another without objective standards, obstructing a policyholder from notifying the insurance company about important matters about his/her insurance contract, (iii) inducing a policy holder to provide false information to his/her insurance company, (iv) unduly inducing a policyholder to enter into a new insurance contract by cancelling an pre-existing insurance contract, (v) entering into an insurance contract without the consent of a person, (vi) placing false signature of a policyholder, (vii) soliciting insurance contracts in the name of a person other than who is actually engaged in insurance solicitation, (vii) requiring a policyholder to enter into an insurance contract in relation to a loan, (viii) refusing insurance subscription by a disabled person.56