Explaining Loss Risks First Leads to Fewer Elderly Subscriptions to High-Risk Products

All Financial Sectors' Product Design, Sales, and Consumer Protection Officers Convene
Seoul National University Research Project Results Revealed in the Field
Explaining Losses First Lowered Risk Level by 1.65 Percentage Points

A claim has been raised that sales practices need to be improved, as it has been confirmed that when the loss risk of equity-linked securities (ELS) is explained first, there is a tendency for fewer elderly customers to subscribe to high-risk products.

Choi Seungjoo, a professor at Seoul National University, said at the "Financial Consumer Protection Seminar" hosted by the Financial Supervisory Service on the 26th that "it is difficult for consumers to fully understand the actual investment risks with only formal information at the level of handing out an explanatory document," and suggested that financial companies should improve their explanation methods from a consumer-friendly perspective.

This seminar was organized to share the results of a research project conducted by the Financial Supervisory Service and to discuss directions for improving sales practices. About 200 executives and employees from financial companies in charge of product design and manufacturing, sales, and consumer protection work attended.

The study analyzed ELS sales data and reviewed behavioral economics literature to develop improvement plans for product explanatory documents, and then measured the improvement effects at actual sales branches of commercial banks.

Professor Choi presented the pilot project results, stating that changes in the explanation method had a tangible impact on investment behavior. When an additional explanatory document with an improved graph was provided to 2,227 consumers who visited 60 commercial bank branches selling ELS, and when relatively lower-risk products such as derivative-linked bonds (DLB) and equity-linked bonds (ELB) were presented for comparison alongside ELS, consumers showed a tendency to choose safer products.

In particular, when the loss risk was presented first instead of explaining the profit structure first as before, the risk level of the ELS subscribed to by elderly investors aged 65 and older (the first-call barrier) decreased from 81.76% to 80.1%, a drop of 1.65 percentage points. This means that when losses were explained first, consumers subscribed to safer products.

In addition, when information on comparison products such as ELB and DLB was provided together with ELS, the average number of subscriptions to products other than those with investment risk grade 1 (very high risk) increased from 0.022 to 0.054, a rise of 145%.

As policy suggestions, Professor Choi proposed: introducing a structure that separates losses and gains and explains losses first instead of using a profit-and-loss graph; and establishing a sales process in which bond-type products with lower loss probability than ELS are explained in comparison.

Noh Younghoo, Senior Director General of the Consumer Protection Supervision Bureau at the Financial Supervisory Service, stressed, "This research presentation is the first pilot project result that empirically examines the impact of explanatory documents on consumer decision-making," adding, "It is expected to greatly help in building a sales process that meets consumers' expectations."

Seol Gwangho, Head of the Consumer Protection Department at KB Kookmin Bank, introduced KB Kookmin Bank's plan to adopt the UK Financial Conduct Authority (FCA)'s Consumer Duty. Consumer Duty is a policy introduced by the UK FCA in July 2023 that requires financial companies to overhaul their work systems and establish internal control frameworks across the entire process, including product development, sales, and post-sale management.

Head Seol explained that KB Kookmin Bank is strengthening its internal control framework by: conducting product suitability reviews through the Non-Deposit Product Committee and obtaining final approval from an executive in charge of consumer protection; expanding KPI scores related to compliance with sales procedures; strengthening guidance on preferential terms for consumers when recalculating loan interest rates; and enhancing the authority of the Chief Consumer Officer (CCO) in charge of financial consumer protection.

The Financial Supervisory Service plans to actively reflect in institutional reforms those elements of the pilot projects from this research whose effectiveness has been verified. It also stated that it will continue to communicate with consumers, academia, and the financial industry.