FSS to Require Advance Notice for Bank Loan Suspensions

4th Consumer Risk Response Council

Stronger Disclosure Requirements for Funds

Inspection of Insurance Sales Practices

Lee Chan-jin: "Need to Monitor Vulnerable Borrowers Amid Rate Hikes"

As banks have repeatedly suspended loans without providing sufficient advance notice, resulting in consumer harm, the Financial Supervisory Service has decided to make prior notification mandatory when loans are suspended or modified. The agency will also significantly strengthen requirements for financial investment firms to fully explain 'target maturity funds' currently being sold for the purpose of increasing commission earnings.

On the 4th, Lee Chan-jin, Governor of the Financial Supervisory Service, is reviewing documents at the "4th Consumer Risk Response Council" meeting chaired by him. Financial Supervisory Service

On September 6, the Financial Supervisory Service stated that on the 4th, Governor Lee Chan-jin presided over the 4th Consumer Risk Response Council meeting, where these issues relating to people's livelihoods and financial matters were discussed.

Advance notification for consumers will be strengthened regarding the suspension or change of financial products provided by banks and other financial institutions.

This measure is in response to the increasing instances of banks suspending or reducing loan limits as part of household loan volume controls, without giving consumers prior notice.

However, considering potential side effects such as triggering excess demand or causing a rush, the new requirements will first apply to products for which advance notice is most necessary. The duration, method, and content of notifications will be determined in consultation with the banking sector.

The briefing also highlighted that fund distributors have increased the burden on consumers by recommending funds with upfront fees in order to boost commission earnings.

Target maturity funds are financial products that collect capital over a set period, invest a certain proportion in risky assets such as stocks, and then, once a predefined target return is reached, automatically switch management to safer assets such as bonds until maturity. These products carry the risk of loss due to market fluctuations until the target is achieved.

According to the Financial Supervisory Service, from last year through the first half of this year, 71.8% of investors in publicly offered target maturity funds subscribed to A Class funds, which charge upfront sales fees. While A Class funds are advantageous for long-term investment due to lower ongoing management fees in exchange for an upfront sales charge, the period required to achieve target returns has recently shortened—from an average of 249 days in 2024 to just 57 days in the first half of this year, amid increased market volatility.

The Council plans to mandate that detailed descriptions of such funds, as well as investor cautions, be explicitly stated in fund prospectuses, and will also require further explanation regarding the burden of sales fees.

There was also criticism that illegal practices persist in insurance product briefings and sales, including failures to fulfill the duty to explain products, promising special benefits, or submitting proxy applications. It was noted that measures introduced in July to strengthen procedures for general agencies (GAs) selling insurance products have not yet been fully implemented in the field.

The Council instructed that companies with poor sales practices must strengthen internal controls, and that findings of inspections and consumer advisories should be distributed. More aggressive measures, such as additional undercover checks at briefings and sales expos, were also ordered.

A task force for revising the loss assessment system will be established to develop detailed operational plans regarding the independent loss assessment system and to inspect the actual process of preparing loss assessment reports.

In addition, the Council addressed the court's ban on document scraping for family relationship certificates and similar records, deciding to allow temporary deferrals for financial institutions and to facilitate a transition to alternative methods such as public MyData services.

Governor Lee stated, "Although stock market volatility has eased recently, it still remains at a high level and both domestic and external uncertainties persist," stressing, "We must closely monitor major risk factors in each sector and respond decisively the moment there are concerns about consumer harm."

He further emphasized, "With recent consecutive interest rate hikes, it is essential to closely watch whether unfair sales practices are occurring for vulnerable borrowers and others. Financial institutions must recommend products that suit consumers' investment profiles and transaction purposes, and provide thorough explanations regarding fee levels and any hidden costs."

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