“Market Failure and Effective Financial Consumer Protection in Korea”

Gyoung-Gyu Choi, Dongguk University

Soonhyun Kwon, Dongguk University

Since the 2008 global financial crisis, many countries including Korea have introduced regulatory reforms to the financial sector to protect consumers. This paper examines the effectiveness of proposed regulations in Korea, specifically the principles of suitability, adequacy, and the duty of explanation in sales activity. We have reviewed two cases in Korea: the KIKO options case and the Woori Power Income Fund case. In both cases, such regulatory measures provided little consumer protection nor remedy following the financial debacles. Although the fairness of the product contracts was challenged, and the option sellers were blamed for the financial fallout, under existing standards it was difficult to demonstrate incomplete sales behavior and effectively prosecute sellers. In both cases, consumers voluntarily tried to maximize their utility given circumstances. However we argue that the combined factors of asymmetry of information, lack of financial knowledge on the part of consumers, and the towering market power of big financial institutions have led to the described debacles in financial consumer markets. Considering behavioral economics models under market failure conditions, we suggest that an independent advisory services approach is more likely to be effective compared to the introduction of additional regulations on sales activities and the mandated disclosures.