The 78-Year-Old and the 3x Inverse ETN
A 78-year-old retiree with KRW 120 million in savings visits a foreign securities branch after telling the RM she wants 'safe dividend stocks for living expenses'. The RM recommends a 3x inverse VIX ETN, noting the branch's quarterly revenue target. The branch's suitability system records her as 'conservative' and 'no derivatives experience', but the RM overrides the block by ticking an 'experienced investor' box. The client signs an e-form; the risk explanation is given in English with a Korean one-page summary that omits daily reset and total-loss risk. The call recording stops four minutes before the fee discussion. Six weeks later the position is down 38% and the client complains. The complaint log says 'customer insisted on the product'.
1. Was this a suitability or appropriateness case, or both? Walk through the facts that determine the answer.
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This is primarily a suitability (적합성) case because the RM recommended a specific product after the client stated a conservative income objective. Suitability requires the firm to collect and actually use information on investment purpose, financial situation, investment experience and risk tolerance. The system recorded 'conservative' and 'no derivatives experience', so the recommendation was unsuitable on its face; ticking the 'experienced investor' box without a factual basis is not a cure, and the e-signature does not prove suitability. Appropriateness (적정성) would apply only if the sale were genuinely unsolicited; even then the firm must check whether the product is appropriate for the client and cannot simply execute. Here the file contradicts the 'customer insisted' entry: the RM recommended the product, and the complaint log appears to be an after-the-fact rationalisation. The correct analysis is suitability plus the explanation duty; if the branch argues unsolicited, it must prove that with contemporaneous records, which it lacks.
2. Identify the specific conduct and recordkeeping failures, and explain how each could be characterised under FSCMA unfair-trade-practice and supervisory standards.
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Failures: (1) false or unsupported suitability override; (2) recommending a leveraged inverse product to a conservative retiree dependent on savings; (3) inadequate explanation of daily reset, path dependency, leverage and possible total loss; (4) an English explanation with a Korean summary that omits material risks, so the client could not reasonably understand; (5) a recording gap covering fees, meaning the firm cannot prove disclosure; (6) an inaccurate complaint log. Under the FSCMA, omitting material risk or making a false statement to induce a sale can be an unfair trade practice (부당권유 or 부정거래행위), depending on intent and effect. Supervisory standards separately require suitability, explanation, record retention and fair complaint handling. Consequences include FSS supervisory orders, fines, business suspension for the product line, personnel sanctions, and civil compensation where the breach caused the loss. The revenue-target pressure is an aggravating internal-control failure, not a defence.
3. How should the branch handle the complaint and what should it report to the FSS? What evidence must be preserved?
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Acknowledge the complaint promptly and assign an investigator independent of the RM and the sales chain. Preserve the full call recording, the e-form audit trail, suitability system logs, override reason, product prospectus and Korean summary, fee disclosures, and all messages about revenue targets. Interview the RM and supervisor separately. Assess causation: would a properly informed conservative client have bought a 3x inverse VIX ETN? If not, offer rescission or compensation. Correct the complaint log and root-cause the override. Report to the FSS as required for conduct breaches and complaint-handling failures, with facts, affected clients, remediation and disciplinary action. Do not destroy or re-record evidence. Consider a product-line pause for similar clients, retraining, and a control that prevents RMs from overriding suitability without documented supervisor and compliance approval.