"Risk of Principal Loss"…What Contents Will Be Included in Bank Product Disclosure Statements?

To Make It Easy for Customers to Recognize Products That May Incur Principal Losses

[Asia Economy Reporter Sunmi Park]"This product is different from savings and deposits, and although it is sold by banks, it is not protected by depositor insurance, so there is a risk of principal loss. Have you confirmed this?"

The banking sector will now be required to provide customers with explanatory documents notifying them that partial or total loss of principal may occur when selling financial products that do not guarantee principal.

Based on the "Internal Control Model Guidelines for Non-Deposit Products" prepared together with the Financial Supervisory Service on the 28th of last month, the banking sector plans to newly introduce non-deposit product explanatory documents. These documents are expected to be designed so that customers can easily recognize that the products sold by banks are "products that may incur principal loss."

According to Article 13 of the model guidelines regarding compliance when explaining products, banks must clearly indicate on all documents related to the sale of non-deposit products?regardless of the name such as investment prospectus, non-deposit product application form, key information sheet, or terms and conditions (including online documents)?as well as on their official websites and at the top of advertisements, that the product "may incur principal loss," so that customers can easily understand this.

Additionally, when selling non-deposit products, banks must clearly inform customers whether principal is guaranteed compared to deposits and whether the Depositor Protection Act applies. The content of the asterisked 'Non-Deposit Product Explanation' must be reflected in existing investor confirmation forms or explanatory documents and provided to customers. When banks provide the product explanatory documents to customers, these documents must be pre-approved by the bank’s compliance officer.

When banks advertise, promote, or solicit investments for non-deposit products using past returns or expected returns, the explanatory documents must clearly state that past returns do not indicate future returns, and that expected returns are probabilistic and only realized if all predetermined conditions proceed favorably.

Accordingly, the explanatory documents prepared by banks are likely to include specific numerical ranges for the maximum loss of the non-deposit product the customer intends to subscribe to. For example, statements such as "a loss of 0?20% of the principal may occur" or "a loss of 20?100% (total loss of principal) of the principal may occur" may be included.

Furthermore, banks must use easy-to-understand language in investment prospectuses and terms and conditions so that customers can easily comprehend the risks, product structure, and investment destinations. Important transaction details will be prominently displayed using symbols, noticeable colors, bold and large fonts. Various charts and graphs are also expected to be utilized. This is because, according to the model guidelines, customers must be able to easily understand the extent of potential losses and the maximum possible loss amount depending on the situation.

This content was produced with the assistance of AI translation services.