The measures, outlined by the Financial Supervisory Service (FSS), followed three months of discussions with the Korea Financial Investment Association (KOFIA) and executives from the country's 10 largest securities firms after investors suffered heavy losses from equity-linked securities (ELS) products linked to Hong Kong's Hang Seng China Enterprises Index, which plunged and triggered large principal losses.
The FSS' deputy governor Seo Jae-wan said the ELS losses exposed weaknesses in protecting investors, requiring preventive measures to address them.
Under the measures, set to take effect gradually later this year, securities firms are required to send a one-time alert when the underlying asset of a high-risk ELS approaches within 10 percentage points of the knock-in barrier, the threshold at which principal losses may begin.
The alert is intended to give investors more time to decide whether to continue holding the product or redeem it early. Securities firms will also be required to notify investors when early redemption becomes available and provide guidance to prevent automatic reinvestment in similar products.
Before new products go on sale, it will be mandatory for securities firms to strengthen risk checks during the initial stage, establish clearer standards for selecting underlying assets, and assess whether products are exposed to excessive concentration or heightened market volatility.
Consumer protection, compliance and sales departments will also be required to be more actively involved in the product approval process, while a chief consumer protection officer (CCO) will have the authority to delay products if they lack adequate investor safeguards.
Securities firms will also need to provide clearer information when selling structured products. Summary documents should include annualized and actual returns, recent movements in underlying asset prices, and key features, such as issuers' early redemption rights, to help investors better understand the risks and possible returns.
Post-sale monitoring will also be strengthened. High-risk products will be reviewed quarterly instead of annually, and reports to boards of directors will be required every six months rather than once a year. Securities firms will also set internal standards to detect and monitor potentially unsuitable sales, especially those involving elderly investors.
KOFIA plans to revise its self-regulatory rules in September, and securities firms are expected to update their internal policies and establish systems for providing ELS risk alerts by year-end.
AJP Takeaways:
- South Korea's Financial Supervisory Service (FSS) announced new investor protection measures for structured products on Aug. 6, 2026, following heavy losses in equity-linked securities (ELS) tied to Hong Kong's Hang Seng China Enterprises Index.
- Securities firms will be required to send investors a risk alert when the underlying asset of a high-risk ELS comes within 10 percentage points of its knock-in barrier, the threshold at which principal losses may begin.
- The reforms strengthen oversight across the entire product lifecycle, including product design, approval, sales practices and post-sale monitoring, with stricter governance requirements for securities firms.
- Sales documents will include clearer information on actual and annualized returns, recent underlying asset performance and key product features, including issuer early redemption rights, to help investors better understand risks.
- The Korea Financial Investment Association (KOFIA) plans to revise its self-regulatory rules in September 2026, while securities firms are expected to complete the systems needed for ELS risk alerts by the end of 2026.
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