"Losses" Explained Before Gains... FSS Overhauls Financial Product Explanation Procedures

The Financial Supervisory Service (FSS) is set to overhaul the explanation process for the sale of financial investment products by requiring that potential losses be presented before potential gains. The aim is to prompt investors to recognize risks before returns, thereby reducing cases of misselling and fostering more rational decision-making among financial consumers.

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According to the financial sector on May 6, the FSS is preparing new guidelines that detail the explanatory obligations applied when banks and other institutions sell financial investment products. While these guidelines are not legally binding, they serve as the standard for interpreting the “explanation obligation” under the Financial Consumer Protection Act and act as a practical manual across the industry.

The FSS is currently developing guidelines that specify explanatory obligations by product type, with a particular focus on revising procedures for financial investment products that have a high risk of being missold. The existing framework, which applies the same explanatory standards to securities, banking, and insurance products according to industry segment, has not adequately accounted for the distinct characteristics of each product.

The core of the reform is to rearrange the order of information so that consumers are made aware of potential losses before expected returns when products are sold. Traditionally, the financial sector has presented expected returns first, but this approach has drawn criticism for distorting risk perception, especially among elderly investors. The FSS believes that emphasizing the risks associated with product purchases is essential to enable consumers to make rational choices.

The effectiveness of improved explanation methods in changing actual investment behavior has also been demonstrated. According to behavioral economics-based research, when products are explained in a way that sufficiently highlights potential losses, the proportion of elderly investors choosing high-risk products decreases significantly.

A method of presenting products with different risk levels for comparison will also be introduced. For example, when explaining a high-risk product that does not guarantee principal, a bond-type product with lower loss potential would be included as a comparison group, allowing investors to intuitively compare their options. Additionally, when selling a specific product, the FSS plans to encourage objective disclosure of loss amounts and probabilities based on the entire sales period. The focus is on ensuring that consumers accurately understand the risks of each product at the time of purchase.

An official from the financial authorities stated, “The manufacturing stage is responsible for designing the product structure and risk, while the sales stage is responsible for explaining those risks so that investors fully recognize them. The emphasis of these guidelines is to ensure that the inherent risks of products are properly recognized.”

The FSS will also revise the consumer protection assessment system. One measure under review is to grant incentives, such as exemptions from self-assessment, to financial companies that receive top ratings in governance and consumer protection evaluations. However, detailed application standards will be specified following consultations with the Financial Services Commission.

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