Individual Professional Investors Surge Nearly 8-Fold as Entry Barriers Lowered... Financial Supervisory Service Advises "Cautious Registration"

[Asia Economy Reporter Ji Yeon-jin] It has been revealed that the number of registered individual professional investors has surged nearly eightfold over the past two years since the government relaxed regulations. The Financial Supervisory Service (FSS) advised that, since legal protections for individual professional investors are relatively weak, they should carefully consider whether to register and provided important precautions.

On the 10th, the FSS announced that as of the end of October, the number of registered individual professional investors reached 21,656, an increase of 7.8 times from 2,783 at the end of November 2019 before the system reform. Individual professional investors can trade over-the-counter derivatives such as Contracts for Difference (CFD) and invest in private equity funds without the minimum investment amount requirement of 300 million KRW, allowing them to invest in high-risk products.

In November 2019, the government significantly eased the registration requirements for individual professional investors. Previously, one had to maintain a financial investment product account for over a year with a balance of at least 500 million KRW, and have an income of at least 100 million KRW in the previous year or assets worth at least 1 billion KRW to register as a professional investor. These criteria were lowered to a balance of 50 million KRW and household members with net assets of at least 500 million KRW.

As a result, the number of registered individual professional investors, which was only 1,219 at the end of 2017, steadily increased to 2,193 at the end of 2018 and 3,330 at the end of 2019, before sharply rising to 11,626 by the end of last year. This surge is attributed to securities firms registering individual professional investors and some firms competitively encouraging registration through various events.

According to the FSS, individual professional investors are classified as separate professional financial consumers under the Financial Consumer Protection Act for investment products, and thus the principles of suitability, appropriateness, and disclosure obligations do not apply. Even if damages occur due to mis-selling, individual professional investors must prove it themselves. In contrast, general investors have the burden of proof on the financial product sellers.

Additionally, when applying for small dispute mediation for investment products involving amounts under 20 million KRW, the selling company can still file a lawsuit during the mediation process. When registering as an individual professional investor to invest in specific products such as CFDs or private equity funds, not only those products but all investment products and contracts sold by the company where the individual is registered as a professional investor are recognized under the professional investor status, and relaxed protection regulations apply.

The validity of individual professional investor registration lasts for two years from the registration date. Upon expiration, the selling company must classify the individual professional investor as a general investor and immediately notify the party involved. To switch from an individual professional investor to a general investor, the individual must separately request the conversion from the selling company.

The FSS explained, "Individuals should receive sufficient explanations about the individual professional investor system from securities companies and decide whether to register," and added, "Securities companies must confirm via recorded consent that the investor understands the explanation related to individual professional investor registration."

The FSS plans to monitor compliance with registration procedures by financial investment firms, implementation of investor protection procedures, and the status of individual professional investor registrations, while also preparing measures to protect individual professional investors.

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