"I'll Just Skip Signing Up" One-Hour Surveys and Recordings... Ongoing Controversy Over the FCPA [Financial Innovation: Designing Growth] ③

Implementation of the Financial Consumer Protection Act to Prevent Misselling
Mandatory Explanations Based on the Suitability Principle
At Least One Hour Required for Mandatory Questionnaire
Investor Self-Responsibility Principle Overlooked
Unreasonable Process for High-Risk Investment Products from Launch to Sale
"Investor Self-Responsibility Principle Must Be Emphasized"

Editor's NoteRecently, financial reform has emerged as a major political agenda in the United States and Europe. The main focus is on adjusting the regulations that were strengthened after the 2008 global financial crisis, easing bank soundness regulations, and shifting toward a capital market-centered financial structure. These reforms stem from the awareness that the financial sector is not adequately serving as a catalyst for economic growth. In Korea as well, the need to redesign financial policy is growing. The core is to achieve a balanced redesign between capital and lending, consumer protection and innovation, control and autonomy, and discipline and growth. The next administration must pursue a 'balanced reform' that fosters autonomy and innovation, so that finance can once again serve as a catalyst for economic growth by supporting strategic industries and innovative growth. In this context of rapidly changing domestic and international environments, Asia Economy has examined the direction and challenges of financial regulation. This series focuses not on 'reform that eliminates regulation,' but on shifting toward 'regulation that enables growth.' Beyond simply easing regulations, we aim to present policy alternatives for designing a balanced financial ecosystem where autonomy and innovation coexist.

The Financial Consumer Protection Act (FCPA) was introduced to prevent the misselling of financial products. As issues of misselling continued to arise?such as the KIKO incident, the Tongyang Group commercial paper (CP) crisis, the derivative-linked fund (DLF) scandal, and the suspension of redemption for Lime and Optimus funds?the six major sales regulations (the suitability principle, appropriateness principle, duty of explanation, prohibition of unfair practices, prohibition of improper solicitation, and prohibition of false or exaggerated advertising), which were previously applied only to certain financial products, were expanded to cover all financial products.

In the case of variable insurance, the suitability assessment procedure must be followed even when only checking the product list through non-face-to-face channels. The procedure must be followed even if you simply want to check the product list. There are also frequent cases where customers give up on signing up for a product during the suitability assessment process. Getty Images

Although four years have passed since the law was implemented, complaints persist. This is because the current FCPA is designed to place most of the responsibility on product sellers. Contrary to its original intent, it has been criticized for failing to provide effective consumer protection and for acting as an obstacle from product development to sales. Experts emphasize that, to minimize side effects, the principle of investor self-responsibility should be strengthened, and consumer protection regulations should be shifted from the current 'rule-based' approach to a 'principle-based' approach.

At Least One Hour to Sign Up for a Fund... Suitability Assessment Required Even to View Product Lists

Since the FCPA was enacted, banks have faced higher barriers to entry when selling non-interest products such as bancassurance and funds. When consulting with customers, banks must have them complete an investment profile questionnaire and recommend suitable products based on the results. This procedure is mandatory and cannot be skipped, even if the customer has already decided which product to purchase before visiting. After completing the investment profile, the bank provides product explanations. If procedures such as recording the process are included, it takes at least one hour. This is because banks must strictly comply with the full sales process for high-risk products.

It is even more challenging for investors over 65. The entire process, starting from the investment profile analysis, must be recorded. If a new account is opened on the same day and the customer signs up for two products of the same type, the entire procedure must be repeated twice. Even if customers complain and wish to skip the product explanation, the procedure cannot be omitted.

A bank official said, "Even when the subscriber is not an investor over 65, and the product is not a high-risk fund, employees are still recording the process to protect themselves in case of future disputes," adding, "Customers find it difficult to sign up for products, and bank employees also struggle to sell financial products."

In the case of variable insurance, the suitability assessment procedure must be followed even when only checking the product list through non-face-to-face channels. The procedure must be followed even if you simply want to check the product list to review trends at your own discretion. There are also frequent cases where customers give up on signing up for a product during the suitability assessment process.

Excessive Consumer Protection Responsibility Placed Only on Banks... No Standards for Consumer Protection Personnel

High-risk investment products face disadvantages from the development stage. This is due to the introduction of the 'Best Practice Guidelines for Internal Control of Non-Deposit Products,' which applies only to banks since the FCPA was enacted. A bank official pointed out, "Each product must be approved by the board of directors before it can be sold, so it takes an average of two months to launch a single public fund. While securities firms can quickly launch and sell the same product, customers who only deal with banks have their product choices restricted."

In addition, under the 'Standard Business Conduct Rules for the Manufacturing and Sale of High-Risk Financial Investment Products,' banks are also responsible for monitoring the management activities of private fund managers. Sellers such as banks must retrospectively verify whether fund management aligns with the key product prospectus, and if they find inappropriate management activities, they must directly request corrections. In effect, financial companies selling products are being tasked with the role of supervisory authorities.

On the other hand, there are no clear standards from the authorities regarding consumer protection personnel. Without reference standards, there are limits to expanding personnel. Since there are no separate standards for personnel dedicated to internal control of consumer protection, the number of actual hires remains low. There are also no concrete standards regarding the expertise of dedicated consumer protection personnel. Even if banks want to strengthen their teams, there is no incentive to enhance expertise. This is also due to the lack of separate standards for the expertise of dedicated personnel.

The overall governance system is also lacking, including the independence and expertise of the consumer protection oversight department. An outside director of a bank pointed out, "With the implementation of the FCPA, financial companies are required to appoint a Chief Consumer Officer (CCO) responsible for overall consumer protection, but in many companies, the CCO's term is less than one year, and in the case of holding companies, the CCO often concurrently serves as the CCO for subsidiaries and affiliates, which limits their role."

The Financial Industry Needs Principle-Based Regulation... Investor Self-Responsibility Education Should Also Be Strengthened

Experts point out that regulations should be improved to be 'principle-based.' This is because the current rule-based regulations often lack clear standards and can hinder innovation, which is crucial in the financial industry.

Choi Seongil, a research fellow at the Korea Insurance Research Institute, noted, "Under the current FCPA, the suitability principle emphasizes objectively proving procedures, so the focus is on explanation and consent procedures. As a result, financial companies create procedures to avoid liability, and for financial consumers, the process becomes cumbersome."

Choi further explained, "As the pace of financial innovation accelerates, simple and flexible principle-based regulation is necessary. This means that financial companies should consider what business strategies to use for genuine consumer protection, rather than strategies to avoid regulation."

There were also calls to strengthen financial education for consumers and emphasize self-responsibility. Jung Yushin, a professor at Sogang University Graduate School of Business, said, "Along with financial consumer protection, the principle of investor self-responsibility should also be addressed. Creating consumer protection organizations and having financial authorities supervise them also incurs costs, but there is a tendency to unilaterally shift the responsibility and associated costs of consumer protection onto financial companies."

Professor Jung emphasized, "It is also problematic that financial consumers cannot distinguish between principal-guaranteed deposits, commercial paper (CP), and equity-linked securities (ELS). For more effective consumer protection, it is efficient to educate financial consumers to make wiser investment decisions and to strengthen their sense of self-responsibility in investing."