Ahead of next month's tightening of sales regulations for complex financial investment products, domestic securities firms have began to suspend sales of complex funds such as leverage funds one after another. Complex financial investment products such as leverage funds refer to products with complicated structures and a maximum loss risk exceeding 20% of principal.
According to the financial investment industry on the 25th, NH Investment & Securities and Daishin Securities Co. decided to end sales of 12 and 14 complex funds, respectively, starting on the 1st of next month. Target funds include NH-Amundi 1.5x leverage index securities investment trust and Samsung KOSDAQ150 1.5x leverage securities investment trust.
After last year's "Hong Kong H index ELS loss incident," financial authorities amended the Enforcement Decree and supervisory regulations of the Financial Consumer Protection Act to prevent misselling of complex financial investment products. Accordingly, suitability and appropriateness assessments for related products will be strengthened going forward. The risk appetite considered when recommending these products will be subdivided from the existing four levels to six levels, and the scope of recordings during the sales process will also be expanded.
High-risk funds were evaluated as having slower market response speed after the introduction of a two business-day cooling-off period in 2021, and with further tightening of regulations, the burden of disputes in case of losses has also increased.
NH Investment & Securities said that after the 2021 introduction of the "complex financial investment product sales system," new sales amounts of the funds have been declining, and with additional regulatory strengthening scheduled for this year, they decided to end sales. Daishin Securities Co. also said it made the decision considering that customers may find it difficult to fully recognize the various risks of derivative products.
Earlier, Korea Investment & Securities Co. stopped selling high-risk funds on the 1st of last month, and Kiwoom Securities stopped on the 18th of the same month. Korea Investment & Securities said that because regulatory tightening requires providing videos during the cooling-off period, it planned to resume in July after preparing the related process, but sales have not yet resumed. A Korea Investment & Securities official said, "In the case of equity-linked securities (ELS), we have been providing videos since last month, but for complex funds we are still preparing videos, so it will take more time to resume."
There are investment products that can substitute for complex funds such as leverage and inverse exchange-traded funds (ETFs) that track various underlying assets. From the securities firms' perspective, there is little sales merit for high-risk funds. NH Investment & Securities, while announcing the end of sales for complex funds, also informed customers that leverage and inverse ETFs could be used as alternative products.
Commercial banks are already not selling high-risk funds. Hana Bank, which was the only bank maintaining a sales stance, also halted sales of five leverage and inverse funds from NH-Amundi, Samsung and Hana Asset Management starting this month. From the banks' perspective, a substitute for complex funds is ELS.
In the case of ELS that banks will resume selling next month, profits and losses are structured, such as paying agreed returns when certain conditions are met, and the investment period is usually set at one to three years. On the other hand, leverage and inverse funds that track price fluctuations of underlying assets up to twice up or down generate gains and losses in real time according to index fluctuations, and buying and redeeming is possible at any time.
Accessibility to invest in high-risk funds, which are difficult to explain and sell, is expected to continue to decline. A securities firm official said, "Major banks have not sold complex funds for some time because they lack product timeliness, and there is the alternative of ETFs," noting, "As regulations have also tightened, securities firms' sales of leverage and inverse funds are bound to shrink."