[Practical Finance] How to Adapt to Next Year's Changing Financial Systems... Should You Join ISA and Try Stocks?

Detailed Credit Evaluation Criteria for All Financial Companies
Low-Credit Borrowers Previously Disadvantaged Can Now Obtain Loans

ISA-Enrolled Students and Housewives Also Allowed Stock Investment
Interest Income Tax Exempted Up to 2 Million KRW Profit

Comprehensive Real Estate Tax Rate for Single-Homeowners 0.6~3.0%
KOSPI Transaction Tax Reduced to 0.08%

Illegal Insurance Contracts Can Be Canceled Within One Year
Fourth-Generation Real-Expense Insurance Products to Launch in July

[Asia Economy Reporter Ki Ha-young] Starting next year, various financial systems, both large and small, will change. The credit evaluation system, which serves as the basis for loans and other criteria, will be restructured from a grade system to a score system, and the eligibility requirements for the Individual Savings Account (ISA), known as the all-purpose account, will be relaxed to increase accessibility. While the comprehensive real estate tax rate will rise, the securities transaction tax rate will decrease. From March next year, the Financial Consumer Protection Act will be enforced, strengthening the rights of financial consumers. Simply knowing the financial system changes in the new year can help determine the major direction of your financial planning for next year.

Full Implementation of the 1-1000 Point 'Credit Scoring System'

From next year, all financial companies including banks, insurance companies, financial investment firms, and credit card companies will revise their personal credit evaluation systems from a credit grade system (1 to 10 grades) to a credit scoring system (1 to 1000 points). The criteria for loans and card issuance will be more detailed, and consumers who were previously on the borderline between grades in the existing grade system are expected to benefit.

For example, there is little difference in creditworthiness between the upper range of grade 7 and the lower range of grade 6, but currently, financial companies mechanically do not provide loans to those in grade 7. With the introduction of the credit scoring system, the credit evaluation criteria will be more detailed, potentially lowering the loan threshold for low-credit borrowers who were previously disadvantaged.

Legal credit grade criteria for card issuance and support for low-income financial products will also be applied using personal credit scores. The credit card issuance criteria will change from the existing grade 6 or higher to a NICE Credit Rating (NICE) score of 680 or higher or a Korea Credit Bureau (KCB) score of 576 or higher.

The eligibility for low-income financial products such as the Sunshine Loan will change from grade 6 or lower to 700 points (KCB) or 744 points (NICE) or lower, and the preferential credit limit criteria for mid-interest loans will change from grade 4 or lower to 820 points (KCB) or 859 points (NICE) or lower.

Reform of the Individual Savings Account (ISA)

From next year, students and homemakers will also be able to join the ISA and invest in stocks. To promote ISA subscriptions, the government has relaxed tax support requirements by expanding the eligible subscribers, allowing stock investments, and granting flexibility in contract periods.

The ISA is an account that can manage various financial products such as deposits, funds, and exchange-traded funds (ETFs) in one account. It has a 5-year maturity with an annual deposit limit of up to 20 million KRW, and the combined gains and losses from various financial products are aggregated. For the general type (5-year maturity), interest income tax (15.4%) is exempted up to a net profit of 2 million KRW. For the low-income and farming/fishing types (3-year maturity), tax exemption applies up to 4 million KRW. Net profits exceeding the tax-exempt amount are subject to separate taxation at a rate of 9.9%.

From next year, the eligibility for ISA, which was previously limited to those with income and farmers/fishers, will be expanded to residents aged 19 and older. Those aged 15 to 19 with earned income can also subscribe. The scope of asset management will be expanded to allow investments in domestic listed stocks. Contract periods will be flexible, allowing subscribers to set them autonomously within a range of 3 years or more instead of the fixed 5 years. After 3 years, the account can be terminated or withdrawn, and re-subscription is possible.

The investment deposit limit (currently 20 million KRW per year) will also allow carryover deposits. For example, if only 10 million KRW was deposited in the first year, the remaining 10 million KRW limit can be carried over to the second year, allowing a total deposit of up to 30 million KRW. Carryover is allowed up to a maximum of 100 million KRW. The tax support application period will be abolished, enabling permanent tax benefits.

Comprehensive Real Estate Tax Rates Rise, Securities Transaction Tax Rates Fall

The comprehensive real estate tax rate on housing will increase starting January next year. The tax rate for single-homeowners, which ranged between 0.5% and 2.7% depending on the housing price, will be adjusted to between 0.6% and 3%, and the highest tax rate for multi-homeowners will increase from 3.2% to 6%. The upper limit on tax burden for two-homeowners in designated adjustment areas has been raised from 200% to 300%, and the tax burden limit for corporations has been abolished. The basic deduction of 600 million KRW for calculating the comprehensive real estate tax base for corporations will also be eliminated.

Capital gains tax rates for multi-homeowners in designated adjustment areas will also increase. For single-homeowners with actual transaction prices exceeding 900 million KRW, the long-term holding special deduction conditions will include a residency period. The deduction rate, which was 8% per year of holding period, will be adjusted to 4% per year of holding period plus 4% per year of residency period for transfers after January 1 next year. Tax rates for homes held less than 2 years or for multi-homeowners in designated adjustment areas will increase starting June next year. The capital gains tax rate for homes held less than 1 year, currently 40%, will rise to 70%, and a flat rate of 60% will apply to homes held between 1 and 2 years.

On the other hand, securities transaction tax rates will be reduced from next year: the rate for KOSPI will decrease from 0.1% to 0.08%, and for KOSDAQ from 0.25% to 0.23%. These rates will apply to transfers made from January 1 next year through 2022. In 2023, the securities transaction tax on KOSPI will be abolished (0%), and the rate for KOSDAQ will be further reduced to 0.15%. However, the special rural development tax (0.15%) imposed on securities transactions will remain unchanged.

Enforcement of the Financial Consumer Protection Act

From March 25 next year, the Financial Consumer Protection Act will be fully enforced. The six major sales principles (principles of suitability and appropriateness, duty of explanation, prohibition of unfair sales practices and improper solicitation, advertising regulations), which currently apply only to certain financial products under individual financial laws, will be expanded to all financial products. In particular, a basis for imposing punitive fines (up to 50% of revenue) will be newly established for violations of sales principles (excluding suitability and appropriateness principles) in all financial transactions.

Systems such as the right to withdraw subscription, the right to cancel illegal contracts, and the authority to restrict sales will be activated to prevent damages. For example, if an insurance contract violates sales regulations under the Financial Consumer Protection Act, consumers will be able to request cancellation of the illegal contract within one year from the date they become aware of the violation or within five years from the contract date.

In lawsuits for damages related to violations of the duty of explanation, the burden of proof for intent or negligence will shift from consumers to financial companies, strengthening post-remedies. New systems to prevent attempts to undermine dispute resolution through financial companies’ lawsuits, such as suspension of litigation and prohibition of withdrawal from mediation, will also be introduced.

In July next year, a new 4th generation indemnity insurance product is scheduled to be launched. The core of the product is to separate coverage into insured and non-insured benefits, thereby optimizing deductibles and coverage limits to reduce premiums. For the first time, a premium differentiation system based on payment performance will be applied only to non-insured riders. The re-subscription cycle will be adjusted from the existing 15 years to 5 years.