[2020 National Audit] 6 out of 16 Banks Have Risk-Seeking Investor Ratios in the 80% Range

Assemblyman Kim Byung-wook: "Supervisory Authorities Must Inspect from the Investor Profile Classification Stage"

[Asia Economy Reporter Park Sun-mi] There is a growing concern that banks may be classifying customers as risk-seeking and selling high-risk products accordingly, suggesting that regulatory authorities need to scrutinize the investor risk profile classification process from the outset.

According to the "Fund Risk Propensity Analysis Data by Bank" submitted by the Financial Supervisory Service to Kim Byung-wook, the senior member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, as of the first half of this year, six out of 16 domestic banks showed a risk-seeking investor ratio in the 80% range. Notably, two banks had this ratio exceeding 90%. Bank A, which classified 97% of its customers as risk-seeking this year, also showed a majority of customers with risk-seeking investment tendencies over the past five years (2015: 97.2%, 2016: 97.2%, 2017: 99.3%, 2018: 99.2%, 2019: 93.1%).

The risk-seeking investor ratio refers to the proportion of customers who newly invested in funds and responded that they prefer risks such as accepting principal loss. Customers' investment tendencies are divided into five levels: ▲Aggressive Investment ▲Active Investment ▲Risk Neutral ▲Safety Seeking ▲Risk Avoidance. Among these, only customers classified as Aggressive Investment and Active Investment can be sold high-risk products corresponding to levels 1-2 of the six-level fund risk rating system.

Kim pointed out that the excessively high ratio of risk-seeking investors in banks that typically attract customers with a strong safety preference raises a reasonable suspicion that banks may have deliberately induced customers to be classified as risk-seeking in order to freely sell high-risk products from the start.

Although there are guidelines for classifying customers' investment tendencies, in reality, it is left to the discretion of each financial institution. The 'algorithm' used to determine investment tendencies can be set arbitrarily by the financial institutions, leaving open the possibility that banks might adjust the weighting of questions asked to customers to alter the results.

Kim emphasized, “While banks selling unsuitable products are problematic, if they classify customers as risk-seeking from the outset and then sell high-risk products, regulatory authorities need to scrutinize the investor risk profile classification process from the beginning. In particular, the review should start with examining the different investor risk analysis algorithms used by each bank.”