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FSS to enhance regulations on high-risk financial products following HK-tied ELS losses
Investors who incurred significant losses from investing in ELS products tied to the Hong Kong stock market hold a rally in front of the Financial Supervisory Service in Seoul, Dec. 15, 2023, calling on banks to compensate them. Yonhap
By Jun Ji-hye
The Financial Supervisory Service (FSS), the country’s financial watchdog, is considering enhancing regulations on the sales of high-risk financial products as part of efforts to prevent the recurrence of significant losses suffered by customers who invested in equity-linked securities (ELS) products tied to the Hong Kong stock market.
The control measures would include obligating sellers, such as banks, to separate sales channels of high-risk products from general counters dealing with deposits or installment savings.
According to Rep. Kang Min-kuk of the ruling People Power Party, Tuesday, the FSS stated in a report submitted to the lawmaker that it is currently working on comprehensive improvement plans related to the sales of ELS and other high-risk products.
“We will draw up improvement plans after reviewing the advantages and disadvantages as well as potential impacts of all options, including putting restrictions on banks’ sales of high-risk financial products and separating sales channels for high-risk products,” the FSS said in the report.
ELS refers to hybrid debt securities, whose returns are determined by the performance of underlying equities.
The move comes as investors have incurred significant losses from investing in ELS linked to the performance of the high-risk, high-volatility Hang Seng China Enterprises Index amid a deterioration in relations between the United States and China.
The FSS has identified some mis-selling cases where banks persuaded risk-averse investors to park their money in the ELS product, and is discussing sanction measures to be imposed on such sellers.
The key focus of the upcoming improvement plans is expected to be the separation of sales channels for high-risk products, as many investors who suffered from Hong Kong-tied ELS losses have complained that they invested in the product without knowing about its complex structure and the high risk of principal loss, after mistaking it for a substitute for traditional savings or installment savings.
The FSS is expected to require sales channels for complex financial products to be physically and spatially separated from deposits and installment savings counters. It is also expected to require differing qualifications for sales staff of such products.
Yet, consultation with the Financial Services Commission (FSC) is necessary until the plans are finalized, as the top financial regulator has also been working on its control measures following Hong Kong-tied ELS losses.
“After we draw up our version, we will consult with the FSC,” the FSS said.
Regarding the issue, Kim Byoung-hwan, President Yoon Suk Yeol’s nominee to head the FSC, has also vowed to develop relevant measures to prevent the recurrence of mis-selling after reviewing various expert opinions and international cases.
He made the remarks in his report submitted to the National Assembly before his confirmation hearing that took place on Monday.
With regard to measures to restrict the sales of high-risk financial products only to professional investors, however, Kim took a cautious approach, saying, “Not only consumer protection but also consumers’ choice should be sufficiently considered when restrictions on the sales target are made.”