[Inside Chodong] Early Financial Education Needed to Prevent Another Hong Kong ELS Crisis

Since the financial crisis in 2008, the United States and the United Kingdom have completely changed one thing: they started mandatory financial education for students. The reason behind this was the investment behavior that shattered Wall Street. The name of the derivative product that shook the world was CDO. Translated into Korean, it is '부채담보부증권' (Debt-Backed Securities). Although it is a Korean compound word, it is a term that is hard to understand. Even George Soros, one of the world's top three investors, admitted, "I didn't really know what a CDO was," so it was normal for anyone not to know. The trap was that no one realized this ignorance would lead to a catastrophe.

Now, people who will suffer losses due to ELS (Equity-Linked Securities) based on the Hong Kong H-Index are in a similar situation as back then. Reflecting on the defense of "I didn't know what it was," it goes like this: 'I first heard the term "ELS" at a local bank where I went to open a fixed deposit → I didn't understand it, but a familiar bank employee said there would be no loss unless a war broke out, so I unknowingly signed → I felt uneasy but thought it wouldn't be a problem and left the bank.'

Three years later, the label attached to ELS became 'incomplete sales' and 'loss compensation.' How badly the banks were at fault and how far the compensation will go is uncertain. What is certain is that if the situation is resolved within this framework, a similar incident will happen again someday.

So, I referred to a 2020 report by the Korea Capital Market Institute titled 'Status and Characteristics of Financial Education in Major Countries.' It states that 'major countries agreed that individuals lacking investment knowledge took on risks beyond their capacity, which partially spread the global financial crisis.' It also mentions that 'former Federal Reserve (Fed) Chairmen Janet Yellen and Alan Greenspan pointed out that high financial illiteracy caused the financial crisis.'

Once the diagnosis was made, the U.S. acted quickly. In 2010, it established a presidential advisory committee on financial education. Soon after, the 'National Strategy for Financial Literacy Improvement' was announced. Early financial education took root from this point. Financial topics were incorporated into existing elementary and secondary school subjects. Mandatory education was implemented in 17 states. In high schools, finance is taught through experiential learning. The UK also created a dedicated financial education organization in 2012 and made financial classes mandatory in public education. Australia requires all students to learn finance starting from the 5th grade of elementary school.

What about South Korea? I asked the Financial Supervisory Service. Elementary schools partnered with banks have opportunities to receive financial education from banks. Middle school students can receive financial education during the first-year free semester. From next year, finance will be included as an elective subject for high school students. When examined, there is a curriculum, but it is almost as if it does not exist. That is the difference between mandatory and elective. According to the Financial Supervisory Service, "The extent of students' learning depends on how interested schools and teachers are in finance."

There is no single correct answer in investing. Therefore, it cannot be entrusted to just anyone. Thinking that you are responsible for your own money means you need to have some financial knowledge. What we need is the ability to understand the risks of financial products and to make the most efficient choices according to investment preferences. The conclusion of "It's fine as long as I get compensated, why bother?" will inevitably bring about another fear. The only weapon to overcome fear is predictability. The way to increase predictability is to learn properly from a young age.