From Bittoo to ELDs and Leveraged ETFs... FSS Designates Top Consumer Risk Issues

FSS to Hold First "Consumer Risk Response Council" on March 20
Market Volatility Rises Due to Middle East Risks
Strengthened Monitoring and Consumer Alerts Planned if Risks Are Confirmed

As volatility in the financial markets increases due to geopolitical risks originating from the Middle East, the Financial Supervisory Service has issued a proactive warning regarding high-risk investment products that could cause significant consumer harm. The agency has designated products vulnerable to volatility—such as so-called “investment with borrowed money” (commonly known as “Bittu”), leveraged exchange-traded funds (ETFs), and banks’ equity-linked deposits (ELDs)—as the top consumer risk items and announced plans to strengthen comprehensive oversight and supervision.

According to financial authorities on March 18, Lee Chanjin, Governor of the Financial Supervisory Service, is set to convene the inaugural meeting of the “Consumer Risk Response Council” on March 20, joined by executives and director-level officials, to conduct an intensive review of core risk factors.

An official from the Financial Supervisory Service stated, “We have selected key agenda items based on the principle of identifying risks that could lead to consumer harm across all sectors—banks, securities, insurance, and small-scale finance—in advance. If the council determines that an item constitutes a significant risk and designates it as a final risk factor, we will strengthen monitoring and, as necessary, implement a phased response including meetings and consultations with financial companies, issuance of consumer alerts, and inspections.”

The main agenda items for this council meeting include “Bittu” (leveraged investments), leveraged and inverse ETFs, and private debt funds. ELDs, which banks have sold in a manner similar to deposit products, have also been identified as a core item for review due to their high risk of consumer losses.

ELDs, which banks have marketed like deposit products, guarantee principal but pay additional interest based on the performance of underlying indices such as the KOSPI 200. If the index remains within a certain range, investors can expect annual returns of around 10 percent. However, if the index moves outside this range, the interest rate can plummet to the 1-percent range. In periods of high volatility like the present, there are increasing cases where returns are locked in at levels lower than those of ordinary deposits. According to the Bank of Korea, as of January this year, the average one-year deposit rate at deposit banks was 2.84 percent.

In the securities sector, the Financial Supervisory Service will focus on risks associated with margin lending and leveraged products, which it has warned about multiple times. As of March 6, the outstanding balance of margin loans was 33 trillion won (0.6 percent of market capitalization)—still manageable, but a sharp market decline could rapidly amplify investor losses through forced liquidation. The outstanding balance of stock loans through capital companies and similar entities stands at 1.6 trillion won.

Leveraged and inverse ETFs will also be discussed. Due to their structural features—tracking twice the daily movement of an underlying index, or moving inversely by -1 or -2 times—greater volatility increases the risk of divergence from the underlying index and accelerates losses. Especially with the ongoing instability in the Middle East causing sharp fluctuations in stock markets and oil and commodity prices, concerns over losses from related ETF investments are mounting rapidly.

Additionally, private debt funds—which generate profits through corporate lending—have been identified as risk factors. In the United States, with concerns over overheating in artificial intelligence (AI) investments and profitability debates, the risk of defaults on corporate loans has been highlighted, raising fears of recent fund runs and defaults. In Korea, securities firms have also sold overseas private debt funds, and as of last year, the outstanding balance reached approximately 17 trillion won, prompting authorities to address these risks.

This meeting is one of the measures to fully implement Governor Lee’s emphasis on “proactive consumer protection.” At the end of last year, Governor Lee reorganized the agency to strengthen consumer protection functions and announced plans to establish a supervisory system that identifies and addresses risks in advance.

An official from the Financial Supervisory Service emphasized, “The key is to shift the consumer protection paradigm from post-event response to proactive prevention. In a phase of increased market volatility, we will supervise, inspect, and intensify corrective actions on consumer risk factors from the earliest stages to minimize potential harm.”

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