Financial authorities and the financial investment industry are pushing institutional reforms that strengthen securities firms' voluntary responsibility from product creation through post-sale management, aiming to protect investors in derivative-linked products such as equity-linked securities (ELS).
On the 5th, Suh Jae-wan, deputy governor of the Financial Supervisory Service (FSS), held a meeting with the Korea Financial Investment Association and executives in charge from 10 major domestic securities firms at the Financial Investment Center in Yeouido, Seoul, to discuss reform measures and implementation schedules for protecting investors in derivative-linked products. Earlier, the FSS and the financial investment industry operated a reform task force (TF) from March to June to prepare the related reform measures.
"In line with a product's life cycle, we need to establish a pre-emptive self-inspection system at the manufacturing and review stages of derivative-linked products, and to provide investors with sufficient and timely information at the sales and post-management stages to support their rational judgment," Suh said. "It is necessary to strengthen internal controls, such as securities firms' self-inspection cycles, to protect investors."
Going forward, at the product design and review stage, securities firms will be required to draw up a checklist to be examined when designing products, and operating standards for selecting underlying assets must also be established. At the sales and post-management stage, the need to visualize and specify product explanation materials (disclosures) so they are intuitive and easy to understand—taking into account investors' behavioral economics characteristics—was cited as a reform task.
An "ELS knock-in proximity alert," under which a securities firm will provide advance notice once when the price of an underlying asset of a high-complexity ELS product approaches the knock-in barrier (by 10 percentage points), will also be sent. The self-inspection cycle for high-complexity products will be shortened from once a year to once a quarter, and the board reporting cycle from once a year to once every half year.
Starting with this meeting, financial authorities and the financial investment industry plan to push the reforms swiftly so that the improvement tasks for protecting derivative-linked product investors can work effectively. The improvement tasks will be reflected in each securities firm's internal rules through a revision of the Korea Financial Investment Association's self-regulation rules this September. The plan is also to complete system improvements such as the ELS knock-in proximity alert within the year.
