FSS says ELS losses are adding up

A retail investor surnamed Lee put 135 million won ($124,000) in three equity-linked securities (ELS) from January through March, 2012.

Lee made the decision on the recommendation of a sales employee who said the products, known as ELS, were a low risk because they were linked to large shares and their yields had climbed as much as 18 percent in the past.

Three years later, Lee ended up with just 70 million won, a loss of more than 40 percent.

“I was not informed of the fact that ELS is a high-risk product,” said Lee. “I am considering demanding compensation from the employee who emphasized safety and high yields.”

The Financial Supervisory Service (FSS) recently issued a warning about the increasing risks of ELS as consumer complaints rise and money pours into ELS products these days when interest rates are at record lows and the stock market bullish.

ELS accounted for a total of 61.5 trillion won as of March, according to the FSS and Korea Securities Depository. For the past three months, the amount ballooned by 3.8 trillion won. Compared to last year, the balance surged 54.2 percent.

Since 2010, the amount invested in ELS has expanded 16.9 trillion won a year.

“ELS is a financial product with a high risk of losing principle,” said Cho Seong-rae, director of the consumer protection bureau at the FSS. “But many investors are unaware of that and file complaints after they lose money.”

According to the watchdog, the number of complaints jumped from 31 in 2012 to 264 in 2014.

Last year alone, 55.1 trillion won was withdrawn from ELS products, and the total yield of 1.1 trillion won translates to a 2 percent rate. The average yield in 2013 was 5.3 percent.

Last year, 93.5 percent of the total invested, or 51.5 trillion won, was profitable, but the remaining 3.6 trillion won invested incurred a loss rate of 44.4 percent.

Securities firms and banks promoted ELS as an investment option with medium yields and risks.

“An increasing number of consumers are losing money after investing in ELS, but it is not easy to get compensation for the losses after they signed contracts,” said Seo Jeong-bo, head of consumer protection policy research at the FSS. “It is more important to prevent such cases.”

Experts say that both index-linked or equity-linked securities are risky because they rely on stock prices.

Subscribing to ELS products when stocks are high might increase the chance of losing money. Complaints have surged because people, who invested in ELS in 2011 when the Kospi hit 2,200, now face losses due to the comparatively lower Kospi.

Individuals interested in ELS should thoroughly research the fiscal health of the securities firms they are considering, since ELS investments are not protected under the law. Also unprotected are investments in equity-linked trusts (ELT) and equity-linked funds (ETF).

“Measures to prevent sales of such risky products should be taken as early as possible,” said Cho Nam-hee, head of the Financial Consumer Agency.

BY CHO HYUN-SUK [song.suhyun@joongang.co.kr]