Financial Services Commission raises need for bank-sector standard forms; Hong Kong ELS fallout drives push for stronger risk disclosure; banks say sales practices are the real issue
South Korea's financial regulator is internally reviewing a plan to introduce standardized forms for complex, high-risk financial investment products sold through banks — including those distributed via money trusts — to reduce mis-selling and strengthen consumer protection by unifying how investment risks are explained and disclosed.
According to financial authorities Monday, the Financial Services Commission has been conducting working-level research into the need to standardize forms for high-risk financial investment products in the banking sector, after the issue was raised during a recent revision of supervisory regulations on financial consumer protection.
Banks currently follow standard forms drawn up by the Korea Financial Investment Association for the sale of complex investment products, but do so without any unified industry-wide or self-regulatory standard. Some banks go further and apply the general standard investment solicitation guidelines used for ordinary financial investment products, simply attaching a handful of additional documents — such as a subscription withdrawal request form — when selling high-risk products.
Calls have long been made for more thorough risk disclosure on financial investment products such as equity-linked securities, derivative-linked securities and derivative-linked bonds, given their highly complex structures and significant potential for principal loss.
The pressure to strengthen disclosure obligations is particularly acute for banks, which sell such products through trust or discretionary investment arrangements and are widely perceived by customers as conservative, safe institutions — making the gap between expectation and reality especially dangerous. That concern has intensified in the wake of the mis-selling scandal involving equity-linked securities tied to the Hong Kong H-share index (Hang Seng China Enterprises Index), which resulted in losses of 4.6 trillion won (about $2.97 billion).
In response, the Financial Services Commission revised its supervisory regulations to expand the scope of products required to clearly state potential disadvantages at the top of product disclosure documents. The key change extends that requirement beyond existing high-risk financial investment products to cover high-risk money trust contracts and high-risk discretionary investment contracts as well.
"A concrete proposal was made to unify standard forms, and we are currently researching and reviewing it internally," a Financial Services Commission official said.
If the need is confirmed internally, the commission is expected to work with the Korea Federation of Banks to establish common standard forms for high-risk financial investment products across the industry.
A separate set of bank-specific standard forms, if introduced, is expected to help customers quickly grasp the risks of complex financial products and make more careful investment decisions.
"The guidelines for high-risk product investment are admittedly somewhat vague," said one banking industry official. "Standard forms would provide a clearer benchmark from a consumer protection standpoint."
Some, however, argue that standardizing forms amounts to a cosmetic fix. The real issue, critics say, is whether consumer-centered sales practices and internal controls take root on the ground — not whether the paperwork is uniform. That view is reinforced by the fact that banks already apply stricter sales standards than securities firms, based on the financial authorities' comprehensive measures to prevent mis-selling of high-risk financial investment products.
"Following the Korea Financial Investment Association's standards for disclosure obligations as a seller doesn't make much of a difference," said one commercial bank official. "What matters is how faithfully and rigorously those standards are actually applied."
ehkim@heraldcorp.com
