Incomplete sales case of foreign interest rate linked DLS, DLF
DLS linked to foreign interest rates are derivative bond securities issued using the UK's CMS (constant maturity swap) interest rate directly as an underlying asset. DLF are derivatives-funded products that incorporate these DLS into the asset portfolio.
The principal and 3~5% of annual profits are repaid, if foreign interest rates as underlying assets are above a certain number. However, if they fall below a certain number, the principal loss occurs due to the decline in the underlying asset.
As foreign interest rates such as British interest rates continue to fall, the loss of principal is inevitable for these products.
The problem of these products is that there was a high possibility of incomplete sales at the point of sales as shown below.
(1) Sales of products even in situations where the foreign interest rates are clearly falling
The biggest problem with the sales of products was that overseas interest rates, including British interest rate, were falling significantly, when those products were sold. Despite a noticeable decline in foreign interest rates, vendors and asset management companies continued to pushed the sales of DLS and DLF products. If the customer had known or heard about interest rate decline, they would not have invested in this product.
(2) Financial products with a profit structure of an extreme imbalance between profit and loss
Another key problem is that these DLS and DLF have a profit structure with a severe imbalance between profit and loss. For these products, no matter how high the interest rates go, the maximum return that an investor can attain is only 3-5%. On the contrary, if interest rates fall, it has a risky structure which can cause losses close to 100% of the principal. Investors would not have signed up for a product if they had known or understood this profit structure.
(3) Selling DLS and DLF without explanation of complex loss structure
If the value of underlying asset is less than a certain exercise value at the repayment evaluation date, the products are structured to lose hundreds of times of the falling interest rate for each additional 0.01% drop below the exercise value. Investors would not have signed up for a product if they had known or understood the profit structure.
(4) Violation of principle of conformity, duty of explanation and protection of investors, etc.
DLS and DLF seem to have been described as stable financial products, and this have led to sales. Moreover, in the product description, there are expressions such as ”UK”, developed countries in Europe, and 'interest rate', which could lead investors to misunderstand these products for deposits. In fact, most of the investors of these products were conservative risk takers, such as seniors, retirees, and housewives. Therefore, there is a great possibility of violation of the principle of conformity, obligation to explain, or obligation to protect investors during the process of sales.
Hannuri considers that there were serious problems in the product structure and sales process in foreign interest rate linked DLS and DLF, which have been sold since 2018. Therefore, on behalf of the investors, our law firm filed a lawsuit for contract cancellation and damages against vendors and asset management company. Additionally, if necessary, filing a complaint with the investigative agency or requesting a beneficiaries’ meeting may be conducted for strategic judgment or gathering evidence prior to or in parallel with filing a lawsuit.
