Ahead of next month's tightening of sales regulations on complex financial investment products, domestic securities firms have consecutively suspended the sale of high-complexity funds, including leverage. High-complexity financial investment products refer to those with complicated structures, where the maximum loss risk exceeds 20% of the principal.
According to the financial investment industry on the 25th, NH Investment & Securities and DAISHIN SECURITIES decided to end the sale of 12 types and 14 types of high-complexity funds, respectively, starting on the 1st of next month. The targeted funds include NH-Amundi 1.5x leverage index securities investment trust and Samsung KOSDAQ 150 1.5x leverage securities investment trust.
After the 'Hong Kong H Index ELS loss incident' last year, financial authorities revised the enforcement decree and supervisory regulations of the Financial Consumer Protection Act to prevent the improper sales of high-complexity financial investment products. Accordingly, from next month, the investment suitability and appropriateness assessments for related products will be strengthened. The risk profiles considered when recommending these products will be refined from the existing four levels to six levels, and the range of recorded calls during the sales process will also be expanded.
High-risk funds have been evaluated as having a slower market response since the introduction of a reflection period of two business days in 2021, and as regulations tighten further, the burden of disputes in case of losses has increased.
An official from NH Investment & Securities explained that after the introduction of the 'high-complexity financial investment product sales system' in 2021, the amount of new sales for these funds has been decreasing, and with additional regulatory tightening scheduled for this year, they decided to stop sales. DAISHIN SECURITIES also stated that they made this decision considering the difficulty for customers to fully understand the various risks of derivative products.
Earlier, on the 1st of last month, Korea Investment & Securities suspended the sale of high-risk funds, and on the 18th of the same month, Kiwoom Securities followed suit. Korea Investment & Securities stated that due to regulatory tightening requiring video provision during the reflection period, they prepared related processes and plan to resume sales in July, but sales have not yet restarted. A representative from Korea Investment & Securities noted that 'in the case of equity-linked securities (ELS), they have been providing videos since last month, but for high-complexity funds, they are still preparing the videos, which will take more time for resumption.'
There are also investment products that can replace high-complexity funds, such as leveraged and inverse exchange-traded funds (ETFs) that track various underlying assets. From the perspective of securities firms, the sales merit of high-risk funds is not significant. NH Investment & Securities indicated to customers that they could utilize leveraged and inverse ETFs as alternative products while announcing the termination of high-complexity fund sales.
Commercial banks are already not selling high-risk funds. Even Hana Bank, which has been the only bank maintaining its sales stance, has also suspended the sale of five types of leveraged and inverse funds from NH-Amundi, Samsung, and Hana Asset Management starting this month. From the banks' perspective, ELS are products that can replace high-complexity funds.
For ELS, which banks are set to resume sales next month, the profit and loss structures are organized to guarantee agreed-upon profits when specific conditions are met, and the investment period is usually set for 1 to 3 years. In contrast, leveraged and inverse funds, which track price fluctuations of the underlying assets up to 2 times, generate profits and losses in real-time according to index fluctuations, and allow for constant buying and redemption.
The accessibility to invest in high-risk funds, which have complicated explanations and sales processes, is expected to continue to decline in the future. A representative from the securities firm stated that 'major banks have not sold high-complexity funds for a long time due to a perceived lack of timeliness in the products, and there is also an alternative in ETFs,' adding, 'Given the intensifying regulations, the sales of leveraged and inverse funds by securities firms are bound to shrink.'