Financial institutions must return to the principle of ‘customer-first’

As there has been no end to complaints from customers about highly risky structured bonds, one financial institution after another has stopped selling the products.

Banks and securities firms must once again thoroughly implement the “customer-oriented” sales approach they must have pledged to offer.

Unlike common bonds such as government and corporate bonds, structured bonds have a complex structure that incorporates derivatives.

Many of them offer high yields, such as 10% per year. On the other hand, redemption conditions vary according to stock prices, foreign exchange rates and other indicators, and there is a risk of large losses if the indicators fall below a certain level.

Structured bonds were originally intended to be a product for professional investors. They are not suitable for stable asset building. As a major premise, financial institutions are required to explain the risks thoroughly if they are sold to general investors.

However, complaints and consultations from customers have continued. According to the Financial Services Agency (FSA), there were about 670 such cases in fiscal 2019 and about 340 in fiscal 2021.

In one case, structured bonds were strongly recommended, despite the customer’s request for “more secure investment destinations to fund retirement.” Another customer lost 80% of the principal in three months.

In general, bonds are considered a relatively safe asset compared to stocks, which are subject to large price fluctuations. It would be a problem if financial institutions were selling high-risk products based on such perceptions.

Banks and securities firms, which have found it difficult to secure profit margins due to ultra-low interest rates, focused on selling structured bonds as a new source of revenue. The increase in transactions at regional banks was noticeable.

It is unsurprising that financial institutions were suspected of rampantly utilizing sales practices that put their own profits ahead of the interests of their customers.

Many financial institutions, including regional banks, megabanks and securities firms, have stopped selling structured bonds to individuals since this summer. The Japanese Bankers Association has begun an investigation into the situation surrounding structured bond sales, and the Japan Securities Dealers Association is considering revising its sales rules.

Both associations only took action after the FSA issued a report in May calling the sales of structured bonds problematic. So it must be said that their responses were too slow.

In 2017, the FSA decided on “principles for customer-oriented business operations” as the industry’s code of conduct. The move was aimed at changing sales practices that involved earning commissions by getting customers to make frequent replacement purchases of mutual funds and selling complicated products to senior citizens.

The principles stipulate that “financial institutions should conduct business honestly and fairly and in the best interests of their customers.” They appear to have already forgotten that pledge.

Investors, for their part, need to deepen their understanding of the fact that they are taking risks to get high returns.

(From The Yomiuri Shimbun, Dec. 23, 2022)