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The Consumer Protection Act and Korea’s Financial Regulation

Daehong Kwon, CFP, Koreaby Daehong Kwon, CFP 

It has been ten years now since the CFP certification first came to Korea. There are many things yet to be achieved here though when compared to advanced countries such as the United States and Canada, where the financial planning business is very active. The most outstanding piece of the financial planning industry, in Korea, is our regulation.

The financial planning industry in Korea still has many necessary systemic regulations missing. One positive aspect of this is that it allows corporations and individuals a lot of freedom in their practice.

 At the same time though, because the market is still in a growing stage, it also leaves a lot of opportunities abuses and people finding loopholes. There are even financial planners who say publicly that they plan on leaving the profession after making money by various crooked ways during this initial, regulation-lacking stage.

The Proposed Consumer Protection Act in Korea

There is a consensus being formed among the professionals in this field that “we need regulations and legal systems in this country, now.” One issue that has surfaced lately from many regulation debates in Korea is the Financial Consumer Protection Act (yet to be passed). The passing of this act would provide a criterion that determines whether the financial planning industry in Korea can be progressive going forward.

To this date, we haven’t had a regulation on the eligibilities for fee-based advice services. Presently, any financial planner can provide clients with financial advice or similar services and ask for compensations in the name of fees. It is true, of course, that Korean consumers lack awareness of the obligation to pay for a financial advice service, leaving the business still inactive. Despite the lack of awareness from consumers, it is evident that we need criteria and regulations set forth in preparation for the market that will potentially grow much larger in the future. Presently, there are a lot of disputes arising from the lack of consumer protection and/or employers’ accountability systems.

Financial Product Advisory Services

For this reason, the financial authorities have been recently pushing forward a law related to “financial product advisory services.” However, a controversy has arisen from a pending regulation that would provide a required eligibility for engaging in the financial planning practice using fees (i.e., “paid” financial planning), in comparison to charging commissions from product sales from being an employee in a corporation with KRW 500 million or more capital.

The main channels for financial planning practices in Korea are still through an agency that is tied to an insurance company, known as a tied agency, or a GA with a large corporation where the agent is, basically, an individual who relies on product sales commissions for their main income source. In addition, most of the small and mid-sized financial planning companies that have CFP professionals, who are engaged in the business practice closest to the “financial product advisory profession”, have less than KRW 500 million capital. On top of that, most of the financial planners in those companies are practically at a self-employed capacity.

Issues Within The Act

Therefore, while it is obvious that a guideline is emerging when a regulation is necessary, the fact that reality is failing to reflect this is causing a tremendous controversy. Unfortunately, there are views that the act very likely won’t be passed or will be revised. This is for a few reasons:

  • Under this regulation, there won’t be any financial planners who can practice the “financial product advisory service.”
  • In addition, the definition of “financial product advisory service” is very vague. It is not clear if it is another word for financial planning or, more broadly, encompasses general explanations of financial products and provisions of counseling. This is a very delicate, sensitive question that impacts the interests of several concerned entities in relation to their professional realms and creations of licenses.

Should the act be passed as planned, it would likely entail many changes in the directions of financial planning corporations and financial planners.

Implications of the Consumer Protection Act

First, small financial planning firms would have to come up with restructuring programs to enlarge their capital and establish a business model in which their employees, not self-employed professionals, practice in the firms. In the process, some small companies that fail to meet the minimum capital requirement may have to seek investment from outside sources to survive or be forced to merge with a larger company. Another option might be to set up a separate subsidiary that would be engaged solely in financial product advisory services.

Financial planners could give up the “paid” financial planning business or provide “free” financial planning-level client services for a marketing purpose, engaging largely in product sales on a commission basis. This would be acceptable because the pending law only limits fee collection from “financial product advisory services” and doesn’t discuss using free financial planning advisory for the purpose of marketing. However, one can point out that this would mean a digression, being a tentative measure that wouldn’t be beneficial to the development of the financial planning industry.

Increased Competitiveness and Further Development of the Financial Planning Industry

The regulation on the floor — a major one for the first time in the Korean FP industry — will prompt many interested people to ponder upon their future paths. While it may bring about some failed companies and financial planners down the road, it will, I believe, in a long-term sense, help establish a stable market order and promote the competitiveness of corporations and individuals, furthering a development of the financial planning industry in Korea.

I am, personally, trying to use the new regulation for my benefit, rather than waiting for adverse effects to take place. My colleagues and I are analyzing varied strategies to increase our competitiveness under a new market regime.

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