Consumers face extreme information asymmetry when compared to financial companies, which possess vast capital, organizational resources, specialized expertise, and extensive information. This disparity underscores the necessity for proactive consumer protection in financial products. The Financial Consumer Protection Act outlines principles such as suitability, appropriateness, and the duty to explain that financial companies must adhere to.
However, the principles established for consumer protection often yield unintended consequences in practice. The specific measures intended to implement these principles can end up protecting financial companies rather than consumers, creating what is known as the "paradox of investor protection measures."
Financial companies conduct investor suitability surveys during the sales process as a means to fulfill the suitability principle. These surveys assess consumers' financial knowledge, investment experience, and risk tolerance. To demonstrate compliance with the duty to explain, companies obtain handwritten acknowledgments from consumers indicating their awareness of risks and operate a "Happy Call" system, where a company representative calls the investor to reiterate key information and confirm understanding.
In reality, however, these systems are often performed as mere formalities. During the survey, sales staff may instruct consumers on how to answer questions to qualify for higher-risk products. The duty to explain becomes a mere procedural step, as complex warnings in documents can be easily downplayed by staff who describe them as "safe products" or "standard paperwork." Regardless of whether consumers fully understand the risks, they often comply with staff requests to indicate that they have "received the explanation" and "understood it." The Happy Call process follows a similar pattern, with staff advising consumers to simply respond "yes" to the scripted questions, undermining the purpose of the call.
As a result, unsuitable products are sold to consumers without a genuine understanding of the risks involved, yet the documentation and recordings demanded by financial regulators remain firmly in the hands of the financial companies. After this process, even uninformed investors appear on paper as "greedy professional investors" who fully understood high-risk products and sought high returns.
The discrepancy between perceived and actual risk ultimately leads to hidden dangers materializing. When consumers seek compensation for losses stemming from inadequately explained risks, financial companies present the meticulously collected documentation and Happy Call recordings as evidence. In these records, consumers are no longer seen as victims but as individuals who willingly accepted the risk of total loss in pursuit of high profits. It falls solely on the consumer to reveal the truth, yet they lack the means to prove the actual conduct of the staff. Consumers are unlikely to have recorded conversations in anticipation of losses, and unlike calls to financial companies, personal phone calls or face-to-face conversations with staff leave no record. Consequently, courts often rule that there were no issues in the sales process based on the documentation and recordings submitted by the financial companies.
The method of leaving a paper trail for investor protection measures ultimately gives rise to this paradox. Last year, financial regulators introduced measures to prevent incomplete sales. While improving the performance compensation system (KPI) for financial companies could be a viable solution, other documentation-focused measures, such as the creation of "unsuitability reports," may merely add another layer of formalities, reinforcing financial companies' shields against liability rather than genuinely protecting investors.
Human cognitive abilities tend to favor the words of a familiar staff member over complex paperwork filled with fine print. In situations where staff boast about past stable returns to reassure consumers, the warnings of future risks contained in documents do little to awaken consumer awareness of danger. Even the most rational consumers can feel powerless in the face of information asymmetry and psychological closeness.
To achieve effective consumer protection, it is essential to move away from documentation-centered liability regulations. The compensation systems of financial companies (KPIs) should be restructured to focus on "customer returns" or "complaint rates" rather than sales performance. At a minimum, for high-risk products, the burden of proof should shift to financial companies to demonstrate that they did not engage in incomplete sales, based on compliance with the suitability principle and the consumer's level of understanding. The sales process should be recorded through real conversations rather than paperwork, and if selective recording practices are discovered, the companies should bear responsibility for that alone.
* This article has been translated by AI.
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