In Q4 This Year, 'Risk Ratings' Will Be Assigned and Disclosed for Investment Financial Products

Financial Services Commission Creates 'Guidelines for Calculating Risk Ratings of Investment Products'
Expected to Increase Reliability of Risk Ratings

[Asia Economy Reporter Sim Nayoung] When financial consumers subscribe to investment-type financial products that carry risks such as principal loss, a 'risk rating calculation system and criteria' has been established to help them more easily understand the actual risks of the product. The Financial Services Commission announced on the 24th that it has enacted the "Guidelines for Calculating Risk Ratings of Investment Products" containing these details.

The risk rating calculation criteria, which varied by financial company, have been standardized according to common criteria, and it is expected that the reliability of risk ratings will increase. Going forward, financial consumers will be able to obtain more detailed information about what types of risks, such as exchange rate and interest rate risks, their invested financial products are exposed to, and the degree of those risks.

The guidelines will be applied to newly created and sold financial investment products from the fourth quarter of this year. The guidelines specify the principles for calculating risk ratings of investment products. They regulate the basic matters that financial product sellers must comply with when calculating risk ratings to fulfill their explanatory obligations under the Financial Consumer Protection Act, including the scope of applicable financial products, the risk rating system, and calculation methods.

The guidelines apply to all investment products except for certain products excluded under the Financial Consumer Protection Act. Variable insurance and specific money trusts are included.

While it is the principle that financial product sellers calculate the risk ratings, if the seller deems it more appropriate to use the risk rating set by the manufacturer, they may use the manufacturer's risk rating. Additionally, if there is a discrepancy between the ratings of the seller and the manufacturer, the seller needs to consult with the manufacturer regarding the appropriateness of the rating.

The rating system and calculation method operate on a 1 to 6 scale, with grade 1 being the riskiest product grade. The final rating is calculated by comprehensively considering market risk and credit risk. If there is exchange rate risk, the rating can be raised by 1 to 2 grades to reflect this.

Furthermore, if liquidity risk, complex products, or other product-specific characteristics need to be considered, these should be separately noted and explained, or reflected in the comprehensive rating if necessary. Risk ratings are initially calculated at the time of product recommendation or sale, and for products that are sold frequently or can be redeemed, they are recalculated once a year aligned with the settlement date.

Sellers must establish risk rating calculation criteria and explain the meaning of risk ratings in an easy-to-understand manner to customers when selling investment products. When launching new products, the decision-making process should incorporate procedures for evaluating and reviewing the appropriateness of risk ratings. For existing products, regular appropriateness checks should be conducted.