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Cooling off period now required for high-risk investments
2021-05-14
Tighter regulations for selling high-risk financial products were implemented Monday, as a move to strengthen investor protection regarding derivative-linked funds (DLFs) and derivative-linked securities (DLS).
Under the new regulations, investors will be given a two-business day review period before their investment is finalized. Financial institutions will have to record all sales dialogue to ensure that investors are given adequate information.
The Financial Services Commission (FSC) announced that the enforcement ordinance to the Financial Investment Services and Capital Markets Act went into effect on Monday. The new rules are part of government measures that aim to prevent the re-occurrence of the 2019 DLF miss-selling scandal.
The amendment defines high-risk financial products as investment products linked to derivatives with a risk of loosing over 20 percent in principal, referring to DLS and DLFs. Funds and derivatives with terms and provisions that are difficult to understand, discretionary investment options and money trusts also fall into the category.
If it is unclear whether a product fits into the category or not, it will be examined by the Korea Financial Investment Association (Kofia) and FSC.
Firms that sell high-risk financial investments are obliged to record conversations with retail investors during sales. Investors retain the right to request such recordings.
Investors will be given a cooling-off period of two business days before their investment decisions are confirmed. During that period, the seller has to provide a clear explanation of possible investor risk and principal losses.
Investment is finalized only when the investor reconfirms it, providing their consent via their signature, email, voice recording or other designated methods. If certification is not given within two business days, the fund purchase is canceled and invested money is returned.
Financial products that are traded on local exchange markets including the Kospi, Kosdaq and Konex and products listed on overseas securities and derivatives markets such as foreign exchanges regulated by the National Futures Association are not considered high-risk financial products.
Products exclusively available for professional investors are also excluded from the new regulations. Professional investors are organizations such as the Bank of Korea (BOK), financial institutions and stock listed corporations — any entities that are able to take risks accompanying an investment in light of expertise held in connection with financial investment instruments, or the scale of assets owned.
Senior investors, originally referring to those aged over 70, will now cover investors aged 65 and above. The same obligations will be applied for senior investors purchasing high-risk financial products. From Aug. 10, derivatives, derivative funds, contingent capital securities and money trusts investing in derivatives will also be under such obligations.
“During the early implementation stage, the additional rules may confuse financial service firms and investors, but the recording obligation and compulsory consideration period is a supplementary policy to ensure the effectiveness of investor protection measures, rather than a new set of regulations,” said a spokesperson for the FSC. “We ask for your kind understanding and thorough participation, as these are minimum precautionary measures to prevent astronomical losses and investor disputes.”
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