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Financial Consumer Protection Act and  Issues in Financial Product Advisory Business
2021 Mar/23
Financial Consumer Protection Act and Issues in Financial Product Advisory Business Mar. 23, 2021 PDF
Summary
The Financial Consumer Protection Act will take into effect on March 25, 2021. Given the decade-long legislation process from consultation and enactment to promulgation and commencement, the act is expected to contribute greatly to bolstering financial consumer protection in Korea. In particular, the act introduces financial product intermediary business and financial product advisory business, both of which are expected to widen consumer choices and curb mis-selling of financial products. Also projected is a significant structural change in the market for financial products. One concern is that the potential regulatory gap between financial product intermediary business and financial product advisory business may lead to some issues related to regulatory arbitrage and fair competition. This necessitates close monitoring on any change the law will bring to the market.
The Financial Consumer Protection Act (the Act, hereinafter) that was enacted before more than one year is scheduled to come into effect shortly. The enactment of the Act has significant implications as it has been more than a decade since the law’s basic framework was first proposed in June 2010. However, the implementation of the financial product advisory regulation is delayed until September 25, 2021, leaving a possibility for regulatory arbitrage and fair competition issues. Against the backdrop, this article tries to explore the meaning of the commencement of the Act, and some issues related to the financial product advisory regulation. 


Meanings of the commencement of the Act

Thus far, regulations on financial product distribution and advisory in Korea have been fragmented across financial subsectors, which gave room for regulatory arbitrage. However, now that the Act endorses the principle of applying the same rule to the same activity, financial product distribution or advisory services scattered across different subsectors will be subject to a single regulation. More concretely, the Act classifies financial products into four types—deposit, loan, investment, and protection. Also, the Act divides financial product business into distribution and advisory parts depending on the nature of business activity, while newly establishing the financial product intermediary business as one type of the financial product distribution business.1)
 
Furthermore, the Act focuses on ensuring independent advisory services without the issue of conflicts of interest by classifying financial product distributors (including financial product intermediaries further on in this article) into independent and dependent advisors depending on their stake in product distributors. For example, independent financial product advisors are banned from running a sideline financial product distribution business and being an affiliate of a business group set forth in the Monopoly Regulation and Fair Trade Act (Fair Trade Act, hereinafter). Also, staff in an independent financial product advisory business is not allowed to work concurrently in or be dispatched by a financial product distributor.2)

Korea’s financial product services are more developed in the area of distribution rather than advisory, solicitation rather than intermediation. Before the Act was enacted, financial consumers could barely tap into financial product advisory services in high quality.3) Moreover, financial product intermediary services were not allowed except for insurance and few other products. This is well reflected in Korea’s solicitor systems that took hold for various products, e.g., loan solicitors, credit card solicitors, insurance solicitors, and investment solicitors. 

However, with the Act’s new provision on financial product advisory business and financial product intermediary business in place, financial consumers now can access all types of financial products from one financial product advisor or intermediary. The introduction of MyData will render financial advisory and intermediary services more tailored to individual demand. Going forward, financial consumers are expected to choose financial products suiting their need more conveniently and enjoy one-stop services to manage their wealth from the portfolio perspective. 


Issues related to financial product advisory

With the Act entering into force, new types of financial product advisory and intermediary services are expected to emerge. Because the enforcement date of the financial product advisory business regulation is delayed to September 25, 2021, intermediary services will arrive at the market first. However, the Enforcement Decree of the Act does not allow a financial product intermediary to handle deposit-type products. For some time being, services for those products will be available only from financial product advisors.
 

 
Another issue raised is that the regulatory gap between advisory and intermediary business could facilitate financial product intermediaries—instead of financial product advisors—to provide advisory services. For example, the Act and its Enforcement Decree ban financial product advisors from engaging in a sideline financial product distribution business. Also, they cannot respond to product consultation by a specific financial product distributor nor advertise a specific financial product distributor and its product. On the other hand, financial product intermediaries can freely provide product consultation, and unless getting paid, advisory services as well. 

A financial consumer who seeks to purchase products on a one-off or sporadic basis is likely to choose a financial product intermediary who can handle the whole process from product consultation to contract establishment, over a financial product advisor. Certainly, financial product advisors provide other benefits, such as advice on better product choices without conflicts of interest, and continuous or regular consultation. Nevertheless, financial product intermediaries could be preferred over advisors given the continuity of financial product transactions. Also worth noting is that advisory services of financial product advisors are not free from fees. This could likely predispose financial consumers to prefer cost-free intermediaries.
 
Financial product intermediaries could offer free advisory services because they are allowed to receive commissions associated to product sales from financial product distributors. By contrast, financial product advisors are prohibited from receiving any financial reward such as commissions from financial product distributors. This could be another reason for the projection that financial product advisory services could be advanced further by financial product intermediaries, instead of advisors. As seen in Table 2, Korea’s financial product advisory regulation is similar to that of the UK, and tougher than that of Australia and Singapore. Australia allows advisors—regardless of whether they are independent or not—to take commissions from financial product suppliers unless there is any conflicts of interest issue. Advisors in Singapore are also allowed to receive commissions from financial product suppliers unless the commissions are based on sales performance.4)
 

 
Korea’s leading big tech firms such as Naver and Kakao are forecast to advance into the financial products market as a financial product intermediary, instead of a financial product advisor. Based on their respective competitive edges in search engine and messenger platforms, the two tech firms are capable of providing a financial product platform service where financial consumers can easily compare and access financial products of virtually all financial product distributors. Thus far, they are reported to be preparing for product comparison and intermediary services for some loan- and protection-type products. However, there is a high possibility that those firms will expand the service scope into every type of financial products. In that case, big tech firms could rise as a dominant force in the financial products market, which could possibly make financial product advisors lose their ground.
 


 
Implications

The commencement of the Financial Consumer Protection Act is expected to facilitate or popularize financial product advisory services which have not been sufficiently provisioned in Korea. This could also widen financial consumers’ opportunity to choose financial products that are more suitable and fitted for their needs, while reducing the risk of losing money from mis-selling. Meanwhile, there could be significant regulatory gaps between financial product intermediary and advisory business that can escalate into some regulatory arbitrage and fair competition issues. In response, financial authorities and the industry should closely monitor the financial products market after the Act goes into effect, and take necessary actions for facilitating fair competition and preventing regulatory arbitrage in a timely manner.
 
1) For a comparative look at financial product advisory business and financial product intermediary business, this article uses the term “financial product intermediary business” referring to the financial product agency and intermediary business set forth in the Act. 
2) Under the Act, any entity should meet the independence criteria described above for registering with the Financial Services Commission as a financial product advisor. Hence, an independent financial product advisor is referred to as a financial product advisor further on in this article.
3) According to the plans to facilitate financial product advisory business unveiled by the Financial Services Commission in March 2016, advisory services for individual customers barely exist, while banks’ private banking service is limited to high-net-worth individuals. Although the Independent Financial Advisor system was established in March 2017, no advisor registered with Korea Financial Investment Association as of end-2020. 
4) Other nations such as the UK, Australia, and Singapore use different terms for entities in the financial products market. They use the term financial advisor and financial product manufacturer/supplier, instead of the financial product advisor and the financial product distributor.