[Q&A] FSS: "Retroactive Effect Will Be Allowed for High-Risk Products If Necessary"

Financial Consumer Protection Roadmap and Organizational Restructuring Briefing
Comprehensive Survey and System Reform of Settlement Credit Loans Backed by Accounts Receivable in the Banking Sector
Mandatory Third-Party Risk Mitigation Measures in Product Development

On December 22, the Financial Supervisory Service announced that it may invoke retroactive measures for financial products with a high risk of consumer harm, if necessary. Retroactive effect refers to the application of new regulations to matters that occurred before their enactment, in order to protect consumers and other interests.

In response to issues such as the Homeplus incident and problems with accounts receivable-backed loans (ARBLs), the agency will conduct a comprehensive survey of settlement credit loans in the banking sector, which are secured by accounts receivable, to prevent a decline in credit risk among related institutions. Based on the findings, the agency will prepare measures to improve the system.

To reduce the moral hazard of third parties, such as medical institutions, the agency plans to enhance its preventive system by introducing an obligation to establish risk mitigation measures when developing high-risk financial products.

Sehun Lee, Senior Deputy Governor of the Financial Supervisory Service, is speaking at the "Financial Consumer Protection Improvement Roadmap Announcement and Financial Supervisory Service Organizational Restructuring Briefing" held at the Financial Supervisory Service headquarters in Yeouido, Seoul, on the 22nd. Photo by Chae-seok Moon

Sehun Lee, Senior Deputy Governor of the Financial Supervisory Service, made these remarks at the "Financial Consumer Protection Improvement Roadmap Announcement and Financial Supervisory Service Organizational Restructuring Briefing" held at the agency's headquarters in Yeouido, Seoul, on this day.

The following is a Q&A session with Senior Deputy Governor Lee.

-You announced that you would allow retroactive effect if necessary. Could you explain this in detail?

▲If we determine that consumer risk is severe, we will implement measures such as suspending sales or halting new sales. There may be cases where consumers have already suffered harm from products that have been sold. In such cases, it may be necessary to nullify the contracts from the outset, and we plan to review this option without excluding it. However, there are legal limitations regarding how far we can restrict private contracts, so a legal review will be required.

-What changes would occur if retroactive effect is applied?

▲The process for financial products involves pre-planning and design, discussion by a product review committee, launch, and sales. Currently, most products are sold after self-review by financial institutions, making it difficult to identify issues at the planning stage. We will develop measures for products that have a significant impact on consumer harm. If pre-approval is too strict, it could hinder the foundation for innovative products, so we need to minimize this. However, there are currently significant limitations in suspending product sales even when there is a failure to warn consumers of risks during the sales process, or when high-risk products are excessively sold due to sales targets set by financial companies. We will work with the Financial Services Commission to clarify the guidelines for triggering such measures. This will allow us to suspend sales at an early stage, rather than only after problems have occurred.

-You stated that you will conduct a comprehensive survey of settlement credit loans in the banking sector, such as ARBLs and seller loans, which grant banks the right of recourse against the selling company, and prepare measures to improve the system. What prompted this initiative?

▲There is demand for products guaranteed by third parties other than the debtor, such as ARBLs and seller loans. For those who supply goods and hold receivables, if the bank discounts the receivable, the ultimate repayment obligation falls on a third party. However, if the third party defaults, both parties may become credit delinquents. There is a concern that joint guarantees and similar practices should also be restricted. Whether to restrict individual products or to ban third-party rights of recourse entirely requires legal review. The discussion was prompted by the view that the practice of forcing third-party guarantees in financial transactions is unreasonable.

-You mentioned preparing measures to prevent third-party risks related to high-risk products. Could you elaborate?

▲The number of risk factors linked to external parties in the course of financial companies’ work is increasing. For example, issues are arising with IT outsourcing, external product sales agents, and the behavior of medical institutions related to insurance products. How to manage and control third-party risks that financial companies cannot directly oversee is becoming a critical issue. We plan to review in detail how to block insurance fraud or excessive medical treatment by medical institutions that lead to insurance payouts.

-How are discussions with relevant ministries progressing regarding special judicial police for financial crimes affecting people's livelihoods? Are you planning to introduce investigative authority?

▲There is a consensus that we must respond with full force, given the serious harm caused by financial crimes affecting people's livelihoods. However, practical coordination is needed regarding the specific scope and targets of the special judicial police powers. (We will continue discussions within a consultative body with the Financial Services Commission, Ministry of Justice, and other relevant agencies.) Normally, when special judicial police powers are granted, investigative authority is automatically included. In the financial sector, the Capital Market Investigation Team of the Financial Services Commission has had investigative authority. I understand that investigative authority has been limited in cases of unfair trading in the capital market. For special judicial police in the area of people's livelihoods, there are no such restrictions, so investigative authority would likely be granted as well.

-What is the background for establishing the Bank Risk Supervision Bureau? Is it an organization to promote rationalization of capital regulations or to strengthen risk management?

▲The Bank Supervision Bureau has traditionally handled both risk assessment and supervision for banks, but due to excessive workload in risk supervision, sufficient oversight has not been possible. We plan to separate and assign risk supervision exclusively to the new Risk Supervision Bureau. One of the tasks of the Risk Supervision Bureau will be to rationalize the risk framework to promote productive finance. Along with traditional bank supervision, such as risk assessment and management, the bureau will also review how to reasonably improve regulations related to the transition to productive finance.

-If the Consumer Protection Supervision Coordination Bureau oversees common issues such as real estate project financing (PF) insolvency, will its work overlap with existing sector-specific bureaus?

▲The organizational structure of the Financial Supervisory Service has been centered on sector-specific supervision. Each sector-specific bureau has handled coordination and oversight of common issues. Real estate PF has been led by the SME Finance Bureau. With the establishment of the Consumer Protection Supervision Coordination Bureau, common issues related to consumer protection will be transferred to that bureau. Supervision work not directly related to consumer protection may still be handled by each sector. Work will be allocated based on demand and available resources.