Investor safeguards will be significantly strengthened across the entire process of derivative-linked products such as high-risk equity-linked securities (ELS), from design and sale to post-sale management. The crux is a major reinforcement of internal controls, including having the financial consumer protection headquarters review products from the design stage and making it mandatory for the product approval committee to deliberate on the selection of underlying assets.
On the 2nd, the Financial Supervisory Service held a "derivative-linked products system improvement meeting" at its Yeouido headquarters in Seoul in the morning and discussed measures to strengthen investor protection. The meeting was attended by Cheon Seong-dae, head of the securities and futures division at the Korea Financial Investment Association, and derivative product executives from 10 securities firms.
First, the Financial Supervisory Service urged a strengthening of the pre-design and review procedures for derivative-linked products. To that end, the department designing the product must submit a checklist of items to be reviewed at the design stage to the financial consumer protection headquarters, and if deemed necessary for investor protection, the chief consumer officer (CCO) can defer the product launch.
The procedure for selecting underlying assets will also become more stringent. Securities firms must manage an underlying asset pool in accordance with internal operating standards and include underlying assets in consideration of product characteristics and market conditions. When selecting a new underlying asset or changing an existing approval, they must undergo deliberation by the product approval committee. If the type of underlying asset, settlement currency, loss multiplier, or other elements differ from previously approved products, they must undergo deliberation again.
Investor safeguards during the sales process will also be expanded. Securities firms must use visual materials and other tools to explain the products so investors can more easily understand their structure. In addition, if a high-risk ELS approaches the knock-in barrier within 10 percentage points, they must send an alert to investors. If early redemption fails, they must inform investors that mid-term redemption is possible, and for investors who realized revenue through early redemption, they must also provide guidance to prevent mechanical reinvestment.
Post-sale management will also be strengthened. The voluntary inspections currently conducted once a year will be conducted once a quarter, and board reporting will be conducted once every half year, shortening each cycle. In addition, securities firms must internally set an unsuitable sales management ratio and systematically manage the rate of unsuitable sales.
Starting with this meeting, the Financial Supervisory Service will revise the Korea Financial Investment Association's self-regulatory rules in Sep., and then reflect the related content in securities firms' internal regulations. System improvements such as the ELS knock-in proximity alert system are scheduled for completion within this year.