“Sudden Loan Suspensions Will No Longer Be Allowed”... Financial Supervisory Service Strengthens Advance Notice Requirements

[Financial News] The Financial Supervisory Service will require banks to provide advance notice not only when they suspend loan origination but also when they reduce loan limits. The measure is intended to improve the situation in which financial consumers have difficulty obtaining loans under the government’s policy of tightening lending.
According to the Financial Supervisory Service on the 6th, Lee Chan-jin chaired the Fourth Consumer Risk Response Council meeting on the 4th. The council discussed consumer risks by financial sector and response measures amid continued domestic and international uncertainty and volatility in financial markets. After banks suspended loans without sufficient advance notice as part of household-loan volume management, consumers were unable to obtain mortgage loans and consequently lost their down payments. As such cases continued to emerge, the Financial Supervisory Service decided to make advance notice mandatory when loans are suspended or changed.
The Financial Supervisory Service also decided to substantially strengthen disclosure requirements for target-conversion funds, which financial investment firms recommend indiscriminately to boost their sales-fee performance.
To guarantee financial consumers’ right to know and their right to choose products, the Financial Supervisory Service plans to establish advance-notice measures concerning the suspension or modification of deposits, loans, and investment products. However, to prevent side effects such as a surge in precautionary demand or market concentration during the notification process, the measures will be introduced in stages, beginning with products for which consumer notification is most necessary.
The council also pointed out that, as sales of target-conversion funds increased, sales firms were concentrating their recommendations on funds that charge upfront sales fees, increasing consumers’ unnecessary cost burden. Target-conversion funds raise money for a set period and invest it in risky assets such as stocks. Once a preset target return is reached, they switch to safer assets such as bonds and manage the funds until maturity. In the first half of this year, 71.8% of investors in publicly offered target-conversion funds were found to have subscribed to Class A funds, which charge upfront sales fees and are advantageous for long-term investors.
Accordingly, the council plans to require fund registration statements to detail the costs and advantages and disadvantages of each class. It will also require sales firms to fully explain the burden of sales commissions during the subscription process.
The council also noted that unsound sales practices, including violations of explanation duties and proxy subscriptions, continue during insurance-product briefings and sales at fairs. It decided to strengthen internal controls and conduct additional undercover inspections. In response to inadequate operating standards for the loss-adjustment system and the increase in complaints related to loss-adjustment reports, the council will operate a task force and pursue institutional improvements and inspections of current practices.
Lee Chan-jin said, “Although stock-price volatility has shown signs of easing somewhat recently, it remains high, and domestic and international uncertainty continues. We must not let our guard down.” He added, “We must closely monitor the major risks in each financial sector and respond immediately and decisively whenever consumer harm is a concern.”
[email protected] Park Moon-soo Reporter