“From bank trust services to leverage...” Regulators broaden ETF oversight [fn Market Watch]

[Financial News]  Financial authorities are tightening oversight, from banks’ sales of exchange-traded funds (ETFs) through trusts to the launch and advertising of single-stock leveraged ETFs. The aim is to check for potential mis-selling in the sales process and assess product risks. Financial industry sources say that the combination of inspections and restrictions on new listings has increased the burden of selling and launching products.
According to financial investment industry sources and regulators on the 28th, 89.7% of ETF trust transactions in the banking sector from January last year through May this year used an upfront-fee structure. The same was true of 91.7% of transactions terminated within six months and 98% of those terminated within 10 days. With this model, customers pay the fee upfront when they sign up, so fees can accumulate if they terminate and rejoin within a short period.
The Financial Supervisory Service (FSS) began on-site inspections at six banks and issued a consumer alert to check for potential mis-selling, including the inducement of short-term trading. Final inspection findings and any sanctions have not yet been determined.
Banks are also reportedly adjusting the criteria for incorporating ETF sales performance into their internal key performance indicators (KPIs). Options being discussed include moving away from recognizing all upfront-fee sales in the month of sale and instead spreading recognition across the customer’s holding period, or lowering the weight given to those sales in evaluations. Some branches say that changing the criteria for crediting sales performance could reduce incentives to sell ETFs.
New launches of single-stock leveraged ETFs are being affected in the asset management industry. Following criticism that these products increased volatility during a sharp market downturn, financial authorities are restricting new listings and advertising until the market stabilizes and are strengthening risk disclosures. These are oversight measures applying across the industry, not sanctions targeting any particular asset manager.
The product review process has also become an issue in recent parliamentary audits. The FSS said it had reviewed product structures and risks during the statutory 15-day review period, but lawmakers questioned when the review began and whether the process was proper. Lee Chan-jin, governor of the Financial Supervisory Service, apologized over the controversy.
Some securities firms have independently restricted sales recommendations. Before the launch of single-stock leveraged ETFs, Samsung Securities had already told its private bankers (PBs) that they were not to recommend them. Mirae Asset Securities also told the National Assembly that it classifies leveraged and inverse products as high-risk and does not recommend them.
At the point of sale, there is a growing tendency to be cautious about recommending ETFs as inspections of bank trusts overlap with oversight of leveraged products.
An industry official lamented, “It is true that actively recommending ETFs is burdensome when you are being inspected. The FSS has never said, ‘Don’t sell them,’ but, in effect, the inspections and alerts themselves are having the effect of curbing sales.”
Meanwhile, the FSS says the focus of its inspections of bank trusts is not the ETFs themselves, but whether upfront fees are being used to induce short-term trading. The industry acknowledges the need to check for mis-selling, but remains concerned that this could lead to a pullback in sales and launches.


[email protected] Kim Gyeong-a Reporter