Financial service firms including first-tier banks have actively recommended that customers invest in equity funds. Bank counselors often claim that some popular fund products guarantee high returns compared to installment savings.
Amid the record low deposit rates, the sales volume of equity-linked securities surged to a historic high last year. Investors in the ELS funds will gain or lose according to the stock markets’ performance in Korea and overseas.
Meanwhile, a lingering problem is that some bank customers have not been notified of the risks of losing a large part of their principal from fund investments.
Lots of ELS funds issued by Korean financial firms involved the Hang Seng China Enterprises Index as one of its underlying equity indexes.
After rosy pictures were painted about the Shanghai-Hong Kong Stock Connect, which launched in November 2014, many Koreans signed up for HSCEI-linked funds promoted by banks in early 2015.
Traders were bullish that the index would hover over 14,000 points from May-June 2015. But it lost more than 40 percent in the second half to stay at around 8,000, and the risks have come to the fore.
China’s economic slowdown and the Hong Kong dollar’s depreciation have adversely impacted HSCEI-products with investors suffering huge losses.
If the index fails to regain in the coming weeks or months, a large section of investors may see their accounts pass the “knock-in” barrier — beyond which certain penalties kick in — before their subscription periods mature.
The Financial Services Commission is busy trying to prevent distrust of fund investment from spreading in the market. The regulator simultaneously has the responsibility to look into whether financial firms sufficiently informed their customers of risks.
A representative case out of individuals’ investment failure is that retirees lost a great portion of their severance pay from investment in funds without adequate research.
In 2013, a scandal involving Tong Yang Group hit the market as its management was suspected of pressuring financial units to aggressively sell commercial paper and bonds issued by the group’s debt-saddled manufacturing units, to individual customers without publicizing the risks of the investment. The number of victims exceeded 40,000, including retirees and housewives.
More than 800 billion won ($666 million) ELS based on the HSCEI have entered the knock-in barrier. Some trillion won more will be added to the total if the Hong Kong index drops by 10 percent from the current level. The financial watchdog needs to be vigilant.
