Risky investment funds permitted on limited basis

Banks will be able to sell some potentially risky products despite the recent fiasco in which derivative-linked funds were marketed by these financial institutions and lost much of their value.

The Financial Services Commission (FSC) on Thursday released a regulation that will allow for the approval of equity-linked trusts (ELT) based on any of five indexes: Kospi 200, S&P 500, Eurostoxx 40, Hang Seng China Enterprises Index and the Nikkei 225.

ELTs will have to be public to be approved, and the size of the issue can be no larger than the bank’s ELT balance as of November this year.

Banks have to follow strict investor-protection protocols, which include maintaining records on risk disclosures to customers and the customer acknowledgement of risks and limiting sales to bank professionals specifically assigned to sell the assets.

Last month, the FSC announced a measure that would restrict banks from selling private equity funds or trusts deemed high-risk.

The decision came after a large number of investors, mostly elderly with little understanding of derivatives, suffered massive losses on derivative-linked funds that tracked German 10-year treasury bonds and the swap rates for the British pound and the U.S. dollar.

These derivatives were mostly sold by Woori Bank and KEB Hana Bank.

The Financial Supervisory Service earlier this month ordered the banks to cover up to 80 percent of the losses.

Banks have mainly been selling equity-linked securities (ELS) via money trusts. As of the end of June, trust investment totaled 42.8 trillion won ($36.05 billion), with ELS products making up 40.4 trillion won of that.

The banks have argued that investors will be negatively affected by the financial authority’s restriction, saying that consumers will have to pay higher commissions when trying to invest in ELS products from brokerages, and that some, especially those living in remote areas, will be denied access as these areas have fewer security company branches.

“The recent DLF crisis was a problem of trust in banks,” Eun Sung-soo, the FSC chairman, said on Thursday while meeting with Korean bank executives. “It shows that the public has high expectations when it comes to banks.”

He said that while the public’s trust in banks has been damaged from the recent derivative investment crises, he hopes that this will represent a turning point.

It was Eun’s first meeting with the heads of banks since he took office in September.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]