Korea Capital Market Institute

Mid-risk, mid-return products that provide higher expected returns compared to deposit rates are getting renewed attention as the low-rate, low-growth trend continues. Because retirees cannot expect to have stable incomes from deposit interest alone in the aging era, the demand for structured products is forecast to rise further. In addition, some structured products on high-yield bonds and derivatives will attract greater interest.
The increased supply of innovative products that could incur investment risk is problematic because it raises the chances where investors suffer damages from mis-selling practices of financial investment business firms. Any case of mis-selling has a danger of inflicting massive damages on investors, and undermining the confidence of the financial investment industry. Hence, efforts are necessary to minimize mis-selling practices that could cause investor distrust.
Under these circumstances, this study explores the current state of regulations in Korea and abroad for recommending financial investment products, conducts a comparative analysis on regulations varying among countries, and then examines a direction toward reasonable mis-selling regulation. While countries such as Korea, the US, the UK, and Japan have placed investment recommendation regulations (e.g., the duty to explain, the suitability rule, the adequacy rule, etc.), these regulations are different in their level and range of application. For example, the UK has concrete, detailed investment recommendation rules by the Financial Conduct Authority, while the US operates a stringent regulatory framework based on the self-regulatory body FINRA, legal theories are developed by the SEC and precedents are made by the court. On the other hand, Japan and Korea have laws governing recommendation, e.g., the Financial Instruments and Exchange Act, the Law on Sales of Financial Products, and the Financial Investment Services and Capital Markets Act.
Furthermore, this study analyzes several mis-selling cases both in Korea and abroad. The Korean cases include scandals related to the distribution of KIKO, ELS, beneficiary securities, subordinated bonds of Tongyang Group affiliates, etc. Also analyzed are overseas cases associated with structured products and high-yield bonds in the UK, the US, Hong Kong, Singapore, etc. Through the analysis, we attempt to draw out and examine common denominators in Korean mis-selling cases.
Based on the comparative analysis on the investment recommendation regulation and case studies on mis-selling, we point out some inherent problems in Korea’s relevant regulation and then present recommendations for improvements. The problems include vague substance, ineffectiveness in preventing violations, and mild punishment for violators. We recommend countermeasures, e.g., giving concrete shape to the duty to explain; expanding the use of the provision presuming the amount of damages; adding after-sales activities in the investment recommendation regulation; providing suitability and adequacy reports to customers; strengthening comparative disclosure requirements on the risk of financial investment products; and expanding the range of financial investment products subject to the adequacy rule.