The sale of highly complex derivative products will still be banned, but banks will be allowed to sell equity-linked trusts linked to the KOSPI 200, S&P 500, Euro Stoxx 50, HSCEI or Nikkei 225.
South Korea’s (FSC (Financial Services Commission) has announced a finalised plan to strengthen investor protection against high-risk investment products.
Last month, the FSC said it would ban the sales of private funds and trusts by banks if they are categorised as ‘highly complex’. The move came after derivative-linked funds (DLFs) sold by Woori Bank, KEB Hana Bank and a number of brokerage firms and asset managers caused investors to lose almost all of their principal in recent months.
The FSC now says the government will grant “limited permission” for banks to sell equity-linked trusts (ELTs) where the possibility of loss is less than 100% of principal, they are issued as a public offering, and where the underlying is one of five major stock indexes – the KOSPI 200, S&P 500, Euro Stoxx 50, HSCEI and Nikkei 225.
An enhanced level of supervision, inspection and regulation will be applied to the sales of such products, whereby banks will be obliged to disclose additional information about the investment to customers. Only certified investment advisors on derivative products will be allowed to sell ELT products.
The amount of ELTs that can be sold by the banks will be capped at KRW 40 trillion (USD 34 billion) – the current outstanding amount as end-November.
“Including the Korea Federation of Banks Chairman Kim Tae-young, many bankers asked us to allow the sales of equity-linked products,” an FSC official said, according to Korea Times.
“We have also held several working-level talks with banks. We decided to allow the sales of ELTs, considering that most of their underlying assets are the five major stock indices and they have shown fewer losses through risk diversification, unlike DLFs.”
Under the new measures, ‘highly complex’ investment products will be determined based on the complexity of structure, the amount of possible loss, and whether they are listed or not.
- Derivatives products, derivative-linked securities, and DLFs in which possible losses can exceed 20% of principal will be classified as ‘highly complex’ (cannot be sold)
- Derivative-linked securities with complex structures but which provides principal guarantees of 80% or more will be classified as ‘complex’ (can be sold)
- Investment products, such as stocks, bonds, real estate, as well as equity, bond, hybrid or index funds will be classified as ‘simple’ (can be sold)
In the case where firms are unable to determine whether an investment product qualifies as ‘highly complex’, they may request a decision from the KFIA (Korea Financial Investment Association) and the FSC.
The FSC will also reduce the validity for classification of investors by risk appetite to 1-2 years, compared to the 1-3 years previously announced, to ensure a more up-to-date classification.
Firms that underestimate the riskiness of ‘highly complex’ investment products or sell them as medium risk products will face strict punishment, the FSC said.
Separately, legislators are progressing a bill to enhance the rights of financial consumers and improve the overall public trust in the financial industry.