Hi, guys, this is Tony back.
Before we get into the actual topic today, I would like to ask you a question first. Have you guys heard of a financial term, ‘ELS’? I am pretty sure that you have, but wondering whether you have a clear definition of it. ELS is an abbreviation for ‘Equity Linked Securities’. It is also called ‘ELN’, Equity Linked Notes. The definition of ELS is as follows, ‘ELS is a debt instrument, usually a bond, that differs from a standard fixed-income security in that the final payout is based on the return of the underlying equity, which can be a single stock, basket of stocks, or an equity index. A typical ELN is principal-protected, i.e. the investor is guaranteed to receive 100% of the original amount invested at maturity but receives no interest.’
Hope this definition makes it clear to let you know what ELS is. These days, lots of financial institutions and investment banks are eager to sell their ELS-related products. However, there is a newly introduced regulation against this trend. That is, financial institutions are not allowed to sell ELS products to elderly investors. Why? Let us look into the details of this new measure.
On November 29, 2012 Financial Supervisory Service (FSS) officially announced that financial companies should not sell their ELS related products to elderly investors without experiences of investing in derivatives (ELS products). Before selling ELS related products, there should be a mandatory confirmation in this regard. This new measure was introduced due to the rising concerns that the elderly often have a lack of experience of investing in high-risk derivatives such as ELS products as well as they are not very much familiar with related financial information and knowledge. Without experienced and proper information, the elderly have been exposed to vulnerable positions.
From July last year to June this year, 17.1 percent of ELS and ELT (Equity Linked Trusts) was sold to the elderly investors who are over 65 years old. This is about more than KRW four trillion, showing that the elderly are taking a significant part of investment in ELS related products.
Yes, indeed, financial institutions do provide the investors with a list of provisions and articles specifying that the determination of investment is set by the investor’s own free will. However, despite signing up for this consent, many of elderly investors are still unaware of lots of information and knowledge.
With the new regulation being introduced, elderly investors are requested to think about their investment once again. So, financial companies should give them one-day for reconsideration of their choices prior to actual investment. For the seniors over the age of 80, they are asked to bring their guardian or relatives when making investment decision. This is to encourage more careful consideration with regard to their investment. Also, financial companies are responsible for immediately notifying investment losses to the elderly investors by making phone calls. Additional financial information should be given as well.
We would expect that this measure encourages investment decisions with more thorough understanding of financial products. Also, the elderly investors, who are vulnerable to financial information and a high-risk product, will be appropriately protected by this new measure. Furthermore, I hope that not only the elderly but all of us are taking a bit more careful step when making investment decisions.