FSS Warns "98% Losses from Overseas Leverage ETNs Due to High Return Belief... Caution Needed for Incomplete Sales"

[Image source=Yonhap News]

[Asia Economy Reporter Jihwan Park] #Housewife A has no experience investing in overseas stocks or exchange-traded notes (ETNs). However, after hearing from a securities firm employee that investing in an overseas leveraged crude oil futures index ETN product could yield triple returns, she decided to invest without much hesitation. A firmly believed the employee’s claim that “since oil prices cannot drop to zero, the ETN price is unlikely to become zero,” but this product was delisted just two months after her investment. A suffered a 97.85% loss. Fortunately, it was recognized that the securities firm did not properly explain the product’s characteristics, and through mutual agreement, A was able to receive compensation for the damages.

On the 7th of this month, the Financial Supervisory Service (FSS) held a dispute subcommittee meeting and reviewed A’s dispute case regarding the overseas leveraged crude oil futures index ETN, acknowledging the securities firm’s liability for damages, the FSS announced on the 12th. The FSS dispute mediation subcommittee judged that when a financial company employee introduced a specific financial product to an investor via mobile messenger and phone, claiming it was a product they themselves were investing in, it was not a simple product introduction but constituted an “investment solicitation.”

The FSS stated, “Since the employee solicited an ultra-high-risk (level 1) intraday trading (day trading) product to an aggressive investor (level 2) with no experience investing in overseas stocks, ETNs, or exchange-traded funds (ETFs), this violates the ‘suitability principle.’”

It was also deemed a violation of the duty to explain. When A asked what an ETN was, the securities employee failed to provide a proper answer and only emphasized high returns. When A asked at the time of investment, “Is it possible for the price to become zero?” the employee responded, “Since oil prices cannot become zero, it is unlikely the ETN price will become zero,” which was factually incorrect. The employee also failed to fulfill the legal obligation to confirm the explanation through signatures or recordings after explaining the product.

The FSS urged caution in investment decisions, noting that overseas leveraged ETNs are not mid- to long-term investment products. The FSS said, “Overseas leveraged ETNs that track the underlying index by 2 to 3 times are suitable for investors who can frequently monitor the fluctuations of the underlying index and trade accordingly,” adding, “They are unsuitable as ‘mid- to long-term (buy & hold)’ investment targets.”

The FSS advised that since ETNs can be delisted if early redemption conditions are met, investors must carefully check the related contents in the prospectus. The FSS also emphasized that because ETNs track a wide variety of underlying indices such as stocks, futures, and commodities, and because there are products that track the underlying index inversely (inverse) and by multiples (leverage), investors must fully understand the product characteristics before investing.

The FSS plans to thoroughly verify whether incomplete sales occurred when mediating disputes related to overseas stocks, ETNs, ETFs, and other listed securities in the future. An FSS official stated, “We will especially focus on whether not only the general investment risks of overseas listed securities but also the characteristics and investment risks of individual products were sufficiently explained.”

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