FSS to Strengthen Oversight of Non-Deposit Products Like ELS Before Sales: "Include Details on Losses"

At Least Monthly Notifications for Investment Risk Grade 1 and 2 Products
Focused Investigations on Clinician-Led Insurance Fraud, Including Obesity Treatments, Scheduled for Later This Year
Overhaul of Response Systems for Online Fraudulent Payments

Financial authorities are set to strengthen the pre-screening process for non-deposit products offered by banks, such as equity-linked securities (ELS). It will be mandatory for external experts and product manufacturers to participate in the review of high-risk financial investment products and overseas alternative investment funds. In addition, ELS product brochures must include detailed information regarding potential losses. Focused investigations on insurance fraud, such as medical bill paybacks or clinician-led obesity treatments, are also planned for the second half of the year.

The Financial Supervisory Service (FSS) announced on August 30 that this was discussed at the 4th Financial Consumer Protection Advisory Committee, chaired by Lee Chanjin, Governor of the FSS. Key agenda items included improving the system for non-deposit products offered by banks, enhancing advertising standards for financial investment firms, establishing consumer protection measures for minor car accident patients under auto insurance, rooting out insurance fraud, countering online fraudulent payments, and rectifying unfair financial practices.

To start, consumer protection frameworks are being strengthened throughout the entire process of selecting, selling, and providing post-sales management for non-deposit products at banks. While banks have previously focused on enhancing systems for the sale and post-management of external products following incidents involving DLFs and Hong Kong H Index ELS, the aim now is to consider consumer protection from the early stages of product design and review, even before sales are initiated.

When selling externally manufactured products, a written agreement will be prepared to clarify consumer protection responsibilities for both manufacturers and distributors, and existing contracts will be updated. Manufacturers must inform distributors of any changes in investment risk or product errors and take necessary actions. Distributors will be held accountable for independent reviews for each product, target market selection, sales limit management, and staff training.

For complex products or those with a risk of significant losses, such as sophisticated financial investment products and overseas alternative funds, it was discussed that participation of both external experts and product manufacturers will be mandated during the review process of the Non-Deposit Product Committee. Additionally, when introducing new products, it will become obligatory to provide all relevant materials so that risk management, consumer protection, and compliance departments have ample time to review products, thereby ensuring a sufficient review period.

When selling non-deposit products such as ELS, detailed information about losses will be required in product brochures. For investment risk grades 1 and 2, the minimum frequency for regular investor notices will be shortened to once per month. The characteristics and fee structures of products, depending on the distribution channel—such as banks or securities firms—will also be recorded in the asset management disclosures to help investors compare products that match their investment objectives and horizons.

Sales employees of non-deposit products will only be allowed to sell if they have completed pre-sales training from the product manufacturer, and the process for verifying proxy authority will be enhanced in cases of sales through representatives. The FSS plans to incorporate these improvements into the best practice guidelines for internal controls of bank non-deposit products in the second half of this year after gathering further feedback.

The response to insurance fraud will also be stepped up. The FSS has observed an increasing sophistication of insurance fraud schemes at medical institutions, citing recent cases such as medical bill paybacks at some long-term care hospitals for cancer patient recruitment and clinician-driven obesity drug-related fraud. In the second half of this year, focused investigations will be conducted targeting hospitals and clinics suspected of such practices, with approximately 100 staff, including the Special Investigation Unit (SIU) and insurer SIU personnel, being mobilized, and collaboration with relevant agencies will be pursued as necessary.

Systems to counter online fraudulent payments will also be improved. Minimum function requirements for standard Fraud Detection Systems (FDS) will be set and AI/machine learning-based detection models will be applied. For high-risk transactions, multi-factor authentication will become mandatory, forming a tiered authentication structure based on risk level. In addition, indicators will be developed to assess payment gateway (PG) companies’ response capabilities for fraudulent payments, and standard security solutions will be promoted. Guidelines for PG companies will also be established to reinforce internal controls for anti-money laundering (AML).

The consent mechanism for card company marketing will also be reformed. Recognizing consumer complaints about frequent exposure to marketing calls and texts after opt-in, the consent items will be refined to clearly distinguish between marketing consent for card-related products/services and non-card products/services. The standard consent form will be revised to ensure consumers can easily recognize that they may withdraw consent or opt out of marketing communications at any time, and guidance in this area will also be strengthened.

The FSS stated that recommendations from today’s Financial Consumer Protection Advisory Committee will be actively reflected in future supervisory, inspection work, and system improvements, and that efforts will continue to identify and address structural or customary factors that undermine consumer trust, further strengthening the preemptive financial consumer protection regime.

This content was produced with the assistance of AI translation services.