A Study on the Act on Improvement of Distribution Structure of Mobile Communication Devices
The enforcement of the Act on Improvement of Distribution Structure of Mobile Communication Devices has passed more than nine months. The Act has not been welcomed by most of the people under regulation. Nevertheless, discrimination among consumers is continuously decreasing and the Act seems to bring positive effects on the market. The confusion at the beginning of the legislation has toned down but new problems have risen from the Act. Sellers recruit their customers as sales agencies in order to provide additional subsidy in the form of rebate for sales. This method can lead to the defaults of contract and tax problems. Amending the Enforcement Ordinance or the Act which could be the legal ground for punishing a wide range of expedient and illegal methods is a possible way to solve this new problem. The government should regulate the illegal methods by making laws instead of remaining as a silent spectator.
The Act on Improvement of Distribution Structure of Mobile Communication Devices (hereinafter the ‘Act’) went into effect on October 1, 2014. The Act was implemented to decrease the overheated subsidy competition between mobile carriers and retailers, and to enhance customer benefits in the mobile device market. The Act also eliminated discrimination among customers caused by unclear subsidies at the purchase of mobile devices.
However, the Act has not been welcomed by most of the people under regulation. The public wanted to amend or abolish the Act and several amendments for the Act were introduced in the National Assembly since its enforcement. This is because the Act posed a serious threat to comparatively small sellers who carry on their business by giving more subsidies than big mobile carriers and the customers who buy from them
As the enforcement of the Act has elapsed more than nine months, the confusion at the beginning of the legislation has toned down. However, some of the sellers have secretly started to adopt an expedient method to provide extra subsidies – they advise consumers to become phone retailers to receive more subsidies. Such methods violate the aim of the Act which is to prohibit discrimination of consumers through strict regulation of illegal subsidy for mobile phones. However, since it is not mentioned as illegal in the provisions, regulators have no legal ground for punishment.
The purpose of this paper is to overview the Act, identify components which lead to methods of providing subsidies before and after the implementation of the Act, point out the legal issues related to the expedient method that arose after the Act and suggest solutions.
Ⅱ. Overview of the Act on Improvement of Distribution Structure of Mobile Communication Devices
- Purpose and history of the Act
Before discussing the problems that arose from the Act, a brief introduction of the Act is necessary. In short, this legislation is to ban subsidy discrimination on phone sales. The purposes in detail are as follows:
“Recently, unclear and discriminatory subsidies have caused serious problems such as damage to welfare of customers and impediment to the mobile market development.
The financial resources of subsidies are basically provided by all consumers. This means everyone should receive equal subsidy. However, the welfare of consumers is distorted now – subsidies are mostly concentrated to certain customers who switch from one company to another. As subsidies vary according to when and where the consumers purchase their mobile phones, consumers receive different subsidies even if they buy identical mobile devices. Also, it is hard to predict how the subsidy will change.
In addition, mobile carriers generally give subsidies on the condition that consumers subscribe expensive monthly plans. Thus consumers have no other choice but to subscribe monthly plans offered by the mobile carriers. Moreover, the overheated subsidy competition leads to users’ frequent replacements of mobile devices which increase communication costs and waste of resources.
This Act is enacted to resolve such problems caused by excessive and opaque subsidies and to create transparent and affordable mobile distribution structure which enhances the convenience of users.”
To attain these purposes, the Act was proposed by ruling party lawmaker Representative Cho Haejin and other lawmakers. On May 2, 2014, the plenary session passed the Act on the condition that the Act delegates “Dissociate Announcing System” and “the limit of subsidy” in the Enforced Ordinance, legislated by government. On September 24, 2014, the Regulatory Reform Committee decided to exclude “Dissociate Announcing System”. Korea Communications Commission (KCC) passed the vote of the Enforced Ordinance which stated the maximum amount of subsidy as 300,000 won, on September 25. The Act came into effect since October 1.
- The main provisions of the Act
The main provisions of this Act are summed from Article 3 to Article 7. Articles 3 to Article 6 are closely related to consumer welfare as they regulate the situations related to subsidies. Specifically, these provisions: (1) prohibit mobile carriers, distributors or retailers to discriminate subsidy payments among consumers regarding their subscription plans or residential neighborhoods. (2) force mobile carriers, distributors or retailers to announce the requirement and contents of subsidies they provide, (3) ban them from offering additional subsidies despite the official announcements they make. (4) guarantee the right of choice of consumers by restricting sellers from offering subsidy conditional to subscribing certain plans or additional services for a period of time.
Another important provision is Article 7. Distributors and retailers cannot advertise the subsidies that were given to customers as discounts from the communication contracts. This also forces sellers to send bills that clearly distinguish service charges and installments of mobile devices.
III. Ways to Receive Additional Subsidy – before and after the Act on Improvement of Distribution Structure of Mobile Communication Devices
- Before the enforcement of the Act
Before the Act was enforced, consumers usually used internet sites such as ‘Ppomppu’ and ‘Clien’ or mobile apps such as ‘Hogaeng our hogaeng’ to search information about additional subsidies. Specifically, sellers first published the type of mobile devices, amount of subsidy and conditions of subscription plans in cipher on websites or apps. Then, consumers chose sellers after comparing the conditions suggested. Since the contracts were processed through the internet, the mobile devices were usually delivered by courier service. If the sellers allowed the consumers’ to visit, they went directly to the shop and picked their devices up.
Such deals were made under the table for quite a long time. However, this problem came under the spotlight since the “Galaxy S3 big sale”. Phone retailers gave extra subsidies so that consumers could buy Galaxy S3 with the terminal payment of 170,000 won. It was too late when KCC started to regulate this. People started to wait long for a good deal when buying new mobile devices.
However, the dine and dash cases of phone retailers were increasing rapidly with the rise of illegal subsidies. For example, some sellers added unwanted additional subscription options to consumers’ monthly plans.
- After the enforcement of the Act
There were a few sellers providing additional subsidies in the initial phase of the enforcement of the Act. The methods of illegal subsidies were diversifying. However, as the Act stabilized, collecting new subscribers by giving extra subsidies decreased. Currently, such method is nowhere to be found.
Meanwhile, some people began to make a clever move -known as the ‘Dealer contract (hereinafter “the contract”)’. Purchasers of mobile devices became sellers’ dealer [sales agency] in this contract. When the sellers received rebates from mobile carriers, they provided additional subsidies to purchasers in the form of sales commission. The sellers usually recruited dealers through mobile applications or internet message boards.
Ⅳ. Legal Issues that Arose from Dealer Contracts and Suggestion for Solving the Problems
- Legal Issues that arose from the Contracts
Sellers deceived consumers by persuading them that the contract was within legal bounds. Nevertheless, there were some points that proved to be problematic. First, as the purchasers and sellers were the contracting parties, purchasers were not able to pose any problem about the contract to mobile carriers as they were not responsible for the contract. Also, signing the agreement could lead purchasers who have the duty of the prohibition of concurrent offices to violate it.
Tax burden on the consumers was another big problem. The sales commission given to customers was defined as business income which was the subject of composite income tax. If the customers did not file the income tax return, additional taxes would have been imposed to consumers. The sellers often did not inform customers about the tax problem.
Moreover, there was the issue of protecting personal information. Sellers asked customers to provide their student ID or employment certificate before giving information about themselves or the contract. They explained that such certification was needed to prevent phone paparazzi. The sellers guided their customers to erase any critical personal information. However, the name of the customers had to be shown. This can cause serious problems such as leak of personal information and masquerade under the customers’ name.
Many problems can be caused by the contract. Clearly, the contract has to be either regulated or prohibited.
- Suggestions for solving the problems
Reviewing the issues of this Act prompted several possible solutions. The government should pay more attention to the information of online communities. A newspaper article, which mentioned about the problems, was posted online last year. However, there was no movement to solve the problems. Advertisements on the internet which recruit sales agency could be easily found. The positive attitude of the regulators could alert sellers and purchasers.
Second, the Enforcement Ordinance defined all expedient methods which provide any additional subsidy in any form as crime. Of course, the Act must delegate authority to the Enforcement Ordinance to enact and punish such behaviors. Also, revising the Enforcement Ordinance would be easier than revising the Act.
The main points of the Act are to require mobile phone manufacturers, carriers and retailers to disclose their subsidies, ban them from pressuring customers into costly monthly plans and allow customers to choose between subsidies and monthly rate discounts. It also aims to prohibit promotions that disguise price cuts on monthly plans as long term contract subsidies and require mobile carriers to report manufacturers’ subsidies to the government. According to the reports from KCC, discrimination in subsidies has been quite solved after the enactment of the Act.
Even then, there are still many amendments to be made in order to accomplish the purposes. In my opinion, the most urgent thing to do is modifying the Enforcement Ordinance or the Act to define the expedient methods of providing illegal extra subsidy. Of course, the Act requires the effort of sellers and consumers too. Sellers should not offer subsidy expediently to increase their sales records. Purchasers should be aware of the illegality of expedient methods and make the right decision. Only then, the mobile market can step in the right direction and fulfill both the sellers’ and purchasers’ wishes.
 Currently, the subsidy from mobile manufacturers and mobile carriers are not divided. This system was designed to force the sellers to separately disclose the subsidy from them.
 Another well-known big sale is “211 Big sale’ which held on 11 Feb. 2014.
 A policy designed to detect those mobile operators that give out illegal subsidies. Under the policy, any consumer can report when a mobile operator gives out more subsidies than suggested in the government guideline and gets rewarded for his honesty, Kristen Park, Phone-parazzi gets applied to all offline phone stores from June, Whowired (May. 30, 2014), http://www.whowired.com/news/articleView.html?idxno=401805 (last visited Aug. 3, 2015).
 Choi Dong Hyun, The appearance of dealer contract (trans. by writer), The Asia Business co., Ltd. (Nov. 07, 2014), http://media.daum.net/digital/newsview?newsid=20141107095510029 (last visited Jul. 13, 2015).
 Kim Jung-yoon, Assembly passes law to restrict phone subsidies, Korea Joongang Daily (May. 08, 2014), http://koreajoongangdaily.joins.com/news/article/article.aspx?aid=2988844 (last visited Jul. 13, 2015).