Financial Services Litigation

As is the case in many other jurisdictions, banks and financial services providers have a general duty under article 46 of the Financial Investment Services and Capital Markets Act (FSCMA) to protect their customers when selling financial products or managing financial products on their behalf. Actions most commonly brought against banks and other financial services providers by their customers are claims for damages based on allegations of a breach of such duty. Prior to making sales, financial services providers are required under article 46-2 of the FSCMA to provide questionnaires to their customers to ascertain their investment experience and goals, which they are required to analyse to determine their suitability. Article 47 of the FSCMA also provides that banks and financial institutions are required to explain the terms and risks of the relevant financial products by providing sufficient information on the products, including the investment prospectus. Numerous legal actions have been brought by customers alleging that the questionnaires and investment prospectus that were provided to them were mere formalities and that the relevant documentation was not provided in a timely manner or contained false or misleading information suggesting or indicating that the potential risks of the financial investment at issue were low. Customers have sued on grounds of breach of such duty to protect, not only regarding complex structured and derivative products such as real estate funds (REFs) and equity linked securities (ELSs), but also on relatively plain-vanilla products including general corporate bonds and commercial papers. Both retail and institutional customers have sued on such grounds. Generally, the courts have tended to apply stringent standards against banks and financial services providers in such actions brought by investors. Both retail and institutional customers also frequently sue on grounds of breach of contract. Korea’s legal system is based on the Civil Code; therefore, common law claims do not exist.

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Articles 176 and 178 of the FSCMA prohibit:

• the trade of financial products with intent to fix or stabilise the market price of the products (market manipulation); and
• the trade of financial investment products utilising unfair means, schemes or tricks (unfair trading).

These provisions have been interpreted by the courts to provide duties directly to the customers. For example, in a case involving ELSs where the original ELS issuer entered into a back-to-back ELS transaction with another financial institution, who then traded the underlying shares in the exchange to hedge its position following a delta hedge model, the court allowed the investors of the original ELSs to directly sue the hedging financial institution for damages, even when the hedging financial institution did not have any direct contractual relationship with the investors. The court found that the hedging financial institution had affected price formation of the underlying shares of the ELS in the course of its hedging activities and that, as a result, it had violated article 178 of the FSCMA.

As to the provision of information about financial products, there is a primary duty on the part of the issuers to ensure that the information contained in registration statements, investment prospectuses, listing particulars and periodic financial disclosures, are correct (paragraph (1), article 162 of the FSCMA) (see question 3). In addition, a purchaser of securities may sue the underwriters for damages where the purchaser suffered damages owing to materially false facts included in the registration statement or investment prospectus, or where the registration statement or investment prospectus failed to include material facts, in each case, affecting the investment decision of the purchaser. It is noteworthy that while disclosure documents such as the registration statement and investment prospectus are prepared and submitted by the issuer and the underwriter does not have any direct role in its preparation, the underwriter is nevertheless imposed with such a high-level duty of care.

The FSCMA also prevents any person from using, for purposes of trading or other types of transactions, information that may have material effect on an investment decision, prior to such information becoming available to ‘multiple unspecified persons’. Any person that uses such undisclosed information in any transaction is required under the FSCMA to compensate persons that have suffered losses as a result of such transaction.

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Yes. A statutory liability regime exists in Korea for untrue or misleading statements or omissions. Under the FSCMA, if a person who acquires or disposes of securities issued by a corporation that is subject to business or financial reporting sustains damages owing to a false statement or representation of a material fact in periodic business or financial disclosure, or owing to an omission of a statement or representation of a material fact therein, the party submitting such business or financial report is liable for such damages (paragraph (1), article 162 of the FSCMA). The claimant need not show reliance on the relevant document since the FSCMA provides that in such case, causation for loss is assumed (paragraph (3), article 162 of the FSCMA). The likely defendants include:

• the person submitting the business or financial report and the directors of the corporation subject to business reporting as at the time of the submission;
• the person who instructed or executed the preparation of the business or financial report;
• the certified public accountant, the certified appraiser or a credit rating specialist who certified that the description of the business or financial report was true and accurate by affixing his or her signature thereto; and
• the person who consented to include his or her statement of appraisal, analysis or verification to be included in the business or financial report and confirmed the accuracy of such contents, all of whom can be held liable for damages under paragraph (3), article 162 of the FSCMA.

Furthermore, the FSCMA obliges any person who used such misleading information in the sale or purchase of securities to compensate transaction counterparties who suffered losses from such sales or purchase or transactions (articles 178 and 179 of the FSCMA). The FSCMA is a long-arm statute and is applicable to activities conducted overseas that impact persons in Korea, or otherwise have an effect in the territory of Korea (article 2 of the FSCMA).

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In Korea, the duty of good faith is not implied but expressly set forth in article 2 of the Civil Code and is applicable, in principle, to all legal acts conducted between parties, including the sale and purchase of securities. The investor protection duty explained above, including the duty to explain risks regarding the financial products being sold, the duty of care relating to the management of financial products on behalf of customers, liability for untrue or misleading statements or omissions in registration statements, investment prospectuses and other financial information, and the duty on the part of financial institutions to prohibit fraudulent unfair trading, are all duties derived from the duty of good faith.

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Financial institutions do not have an automatic fiduciary duty to all of its customers. Fiduciary duty becomes an issue only in cases where there is a special relationship between the financial institution and the investor under the laws and regulations. These include discretionary investment agreements or investment trust agreements where the banks or financial institutions make investments on behalf of their customers with funds or assets put in a trust and managed by such banks or financial institutions.

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Standard agreements are also effective in principle. However, there are administrative regulations that apply to standard agreements to ensure consumer protection and fairness. For example, the Korea Fair Trade Commission may recommend implementation of corrective actions to business operators (including financial institutions) instructing such business operators to delete or modify unfair terms and conditions (paragraph (1), article 17-2 of the Act on the Regulation of Terms and Conditions (the T&C Act)). If challenged, the court has the power to review to determine whether the relevant provision under the terms and conditions is invalid, if it falls under certain requirements (paragraph (1), article 17-2 of the T&C Act). Further, the Korea Financial Investment Association may establish standard terms and conditions to promote sound trading practices and prevent the common use of unfair terms or conditions (paragraph (3), article 56 of the FSCMA).

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In principle, a financial institution (like any other commercial party) may enter into an agreement with its customers, to limit or exclude its contractual liability and liability for tortious acts. Therefore, it should be possible for financial institutions to limit or exclude liability resulting from violations of the duty of investor protection. However, it is the prevailing view of the Korean courts that such limitation or exclusion should not apply to liability for tortious acts caused by wilful misconduct or gross negligence, since such acts are ‘acts against social order’. In addition, a contract executed between a general investor and the financial institution is considered a ‘standard term contract’ and must comply with the terms of the T&C Act. The T&C Act provides that ‘unfair terms and conditions, including provisions that are unreasonably unfavourable to customers are invalid’. Although there are no cases that have specifically addressed this issue, it would be difficult to view the relationship between a bank or financial institution and its retail customers to be on the same level (ie, a ‘horizontal relationship’). If this is true, it is likely that provisions that limit the liability of financial institutions for tortious acts relating to their duty of investor protection would be considered a provision that is ‘unreasonably unfavourable’ to customers and deemed invalid pursuant to the relevant laws and regulations. Meanwhile, the Korea Financial Investment Association, a non-profit, self-regulatory organisation founded under the FSCMA, reviews the standard terms and conditions of the contracts of financial institutions and publishes the results of its review, which are often referred to by the courts and regulatory agencies.

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Courts will strike down penalty clauses (in whole or in part), even if agreed among the parties, for being against public order and morality, in cases where they determine that the enforcement of such penalty clause would cause ‘excessive hardship to the performing party’. Moreover, damages for delay may not exceed the maximum interest rate prescribed under the Interest Limitation Act, and the portion in excess of the maximum interest rate will be deemed invalid. In addition to such general rules, there are also separate provisions under the detailed rules applicable to each type of financial product.

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The relevant parties may seek:

• specific performance of the contract;
• rescission or cancellation of contract;
• termination or withdrawal of contract; or
• damages or return of unjust gains, etc.

In urgent cases, parties may file applications for preservation measures such as provisional attachment or injunction.

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Not applicable.

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Korea has no specialist court that exclusively handles financial services disputes; however, generally, the courts have designated court panels within district courts to hear issues relating to commercial law, which cover disputes involving banks and financial services companies. No separate requirement is specified under Korean procedural laws for a case to be heard by a court panel designated to hear commercial law cases. The court assigns cases to such commercial court panels at its discretion based on a review of the claim document filed by the plaintiff.

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Korea has no special procedural rules that apply to financial services litigation in general; however, the Securities-Related Class Action Act applies to certain claims for compensation of special damages in relation to certain securities.

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Yes. Parties are free to submit their financial services disputes to arbitration if they have agreed to do so in their contract; however, this is not customary practice for disputes between financial services institutions and their retail customers and occurs more in the context of disputes between banks or financial institutions and their institutional investors.

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No. Parties are not required to seek settlement out of court or refer financial services disputes for alternative dispute resolution unless the contact from which the dispute arises contains a provision that requires such efforts for out-of-court settlement or referral to alternative dispute resolution.

For an example of alternative dispute resolution procedures available in Korea, see question 27 regarding the Financial Dispute Mediation System.

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The Civil Procedure Act of Korea does not require litigation to be preceded by a mediation procedure, nor does it mandate mediation or prior communication to the counterparty (eg, notices). However, specific contracts may provide for such pre-action communication or notices, which would generally be enforceable under the contracts. Litigation may commence immediately if there is a dispute, without the need for further notice or a cooling-off period.

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Except for cases where jurisdiction is determined by mandatory law, parties may agree on the jurisdiction for the trial at the court of first instance. However, if a jurisdiction clause is included in the terms and conditions between the consumer and financial institution that appears to be for the convenience of the financial institution only and imposes an unfair burden on the part of the customer, the terms and conditions may be considered unfair, and a Korean court may rule such clause to be invalid as an agreement ‘unreasonably unfavourable’ to the consumer.

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As is the case in many other civil law jurisdictions, the Korean Civil Procedure Act does not impose any general disclosure obligation on the parties. Therefore, there is no general procedure for disclosure or discovery and depositions often found in common law systems. Application for disclosure must be made on a case-by-case basis to the court and must specify a fairly specific scope of documents being sought.

Information regarding financial transactions is disclosable in litigation involving financial institutions. Although confidentiality of information held by financial institutions regarding financial transactions is protected under the Act on Real Name Financial Transactions and Confidentiality (the Real Name Act) (item 1, paragraph (1), article 4 of the Real Name Act) a litigant may request that such information be disclosed by filing an application to the court. The court will issue an order granting such application if the court deems the disclosure of such document to be necessary for purposes of the litigation proceedings. Failure to produce it will allow the court to draw adverse inferences regarding the non-disclosed information.

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For a bank or financial institution defendant that wishes to dispute the requested disclosure of information, such a bank or financial institution must mount a defence arguing that the requested information regarding financial transactions is irrelevant to the litigation or that such information constitutes ‘official secrets’ of the bank or financial institution that are exempted from disclosure. ‘Official secret’ refers to sensitive and confidential information to the operation and management of the bank or financial institution, such as margin information regarding the relevant product sold by the financial institution. The defendant bank or financial institution should actively submit its opinion to the court to explain the unreasonableness of the counterparty’s application.

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Court approval must be obtained by filing an application with the court for disclosure of financial transaction information to acquire financial transaction information held by a third-party financial services institution. Also, the applicant must provide the personal information of the owner of the financial transaction information, the period for the subject transaction, purpose of use and information regarding the subject transaction.

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We do not have a system of disclosure of evidence prior to litigation (‘discovery system’) under the Civil Procedure Act (see question 17). Therefore, there are no particular data governance or data issues in terms of financial disputes. However, in accordance with the duty of confidentiality of financial institutions under the Real Name Act, financial institutions are prohibited from providing financial transaction information unless they have obtained the written consent of the owner or a court order for disclosure of financial transaction information.

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There is no procedure in Korea by which a regulatory authority would bring court proceedings against parties in violation of rules and regulations administered by such authority. Rather, the regulatory authorities take regulatory action by issuing orders. The regulatory authorities may issue a variety of orders to financial institutions pursuant to the FSCMA, including:

• cancellation of registration;
• suspension of business;
• correction or suspension of illegitimate acts;
• imposition of administrative fines;
• requests for dismissal; or
• suspension of officers from performance of their jobs, etc.

On the other hand, banks and financial institutions (ie, entities that are subject to regulations) may file litigation for cancellation of an order of the regulatory authority with the administrative court, which is a special court that handles actions against administrative agencies only. Also, banks and financial institutions may file an application for temporary suspension of an order issued by a regulatory authority until the administrative court issues its decision. Cases from the administrative court are appealed to high courts. The decisions of high courts are appealed to the Supreme Court.

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No such privilege exists in Korea with regard to communications between financial institutions and the regulatory authorities.

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Private parties may not bring direct actions in court against financial institutions solely for breaches of regulations. Private parties may file lawsuits for compensation of damages if they have suffered damages owing to breach of regulations by financial institutions.

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Financial institutions do not have a general duty of disclosure. Private parties may obtain disclosure of complaints through a court order, after filing an application with the court for an order of document disclosure or request for document delivery (see question 17).

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There is no such proceeding in Korea.

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After the financial crisis of 2007, the regulatory landscape in Korea changed to place more emphasis on the importance of protecting consumers of financial products. Courts also appear to be more focused on consumer protection, especially in assigning liability or allocating the level (ratio) of liability between plaintiff consumers and financial institution defendants.

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There is a Financial Dispute Mediation System run by the financial regulatory authority, the Financial Supervisory Service (FSS), which seeks amicable resolution of claims raised primarily by retail investors or consumers against financial services companies. Upon receiving an application for mediation, the FSS investigates the underlying facts subject to the dispute and issues a ‘mediation opinion’ for consideration by the parties. Such mediation opinion is not binding on the parties, and either party may object. If the parties do not object and accept the FSS’s mediation opinion, the opinion will have the same effect as a final settlement agreement. Whether or not to accept the FSS’s mediation opinion is entirely at the discretion of the parties.

Parties in dispute may file a lawsuit with the court without going through the Financial Dispute Mediation System or accepting the mediation decision. The mediation decision does not have the effect of direct evidence during court proceedings but may be used as indirect evidence.

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The Korean government protects financial consumers subscribing to financial products set forth in the Depositor Protection Act. Pursuant to that Act, an individual may receive protection of amounts deposited up to 50 million won in a single financial firm (total amount including both principal and interest).

Financial firms protected under the Depositor Protection Act include banks, insurers (life and non-life), securities firms, savings banks, etc. Not all financial products sold by financial firms subject to protection under the Act are protected. However, most financial investment products are excluded from the scope of protection, even if they are sold by the protected firms.

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Challenges and trends

29 What are the principal challenges currently facing the financial services litigation landscape in 2019? What trends are apparent in the nature and extent of financial services litigation? Are there any other noteworthy features that are specific to financial services litigation in your jurisdiction?

Certain provisions of the Financial Investment Services and Capital Markets Act (FSCMA), one of the key statutes applicable for financial services litigation, have been strengthened in favour of customers. First, the statute of limitations for damage claims under the FSCMA has been lengthened: prior to the amendment, the limitation period applicable to claims for damages caused by unfair trade acts in securities, including acts of market price manipulation (stock price manipulation), use of material non-public information (insider trading), and exercise of fraudulent schemes, was ’one year from the date the claimant becomes aware of the violation or three years from the date the violation is committed’. Under the amended FSCMA that became effective in September 2018, the relevant limitation period is ‘two years from the date the claimant becomes aware of the violation, or five years from the date the violation is committed’. However, the statute of limitations remains unchanged for other damages claims under the FSCMA, as well as for claims brought under the Act on External Audit of Stock Companies for false statements in reporting (ie, in securities registration statement, business report and tender offer statement, etc) or improper audits.

Furthermore, the sanctions for unfair trade act in securities have become much heavier. Previously, the relevant penalty was imprisonment of up to 10 years (ie, without minimum terms), or ‘criminal fines of not less than double but not more than five times the gains obtained from such violation’, whereas under the amended FSCMA, the relevant levels of penalty have been increased to imprisonment of one year or more, or ‘fines of not less than three times but not more than five times the gains obtained from such violation’. These changes reflect the current trend to strengthen the protection of financial consumers from both the civil and criminal perspectives.

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