An elderly man is walking in the street at Jongro in Seoul, South Korea, on Wednesday, Oct. 23, 2013. - Photographer: Woohae CHO / Bloomberg
SEOUL: South Korea’s financial watchdog said it found a range of instances where some of the country’s largest brokers misrepresented risky China-linked structured products to retail investors, many of whom are retirees.
An investigation into five banks and six brokerages uncovered poor regulatory compliance and systematic failures regarding the sale of complex financial products linked to the Hang Seng China Enterprises Index (HSCEI), the Financial Supervisory Service (FSS) said yesterday.
Losses from the popular notes are seen totaling 5.8 trillion won this year, if the index remains at the current level, it said.
Regulators will take further steps such as imposing fines, taking into account how much compensation the financial firms provide to customers and efforts made in regaining their confidence, it said.
The announcement follows a months-long investigation by the FSS into some of the nation’s most prominent retail lenders.
Among these were Kookmin Bank and Shinhan Bank, and brokerages such as Korea Investment and Securities Co and Mirae Asset Securities Co, to see if they had violated any rules or misrepresented the high-risk equity-linked securities (ELS).
South Korea is among the world’s largest markets for the structured products, which have been readily available at retail channels such as local banks and especially popular among the nation’s retirees.
In 2021, the China-linked ELS notes were sold with a three-year maturity, with about 22% of the accounts now held by people of ages 65 or older.
The HSCEI traded well above 12,000 then, but has since slumped, losing more than half its value from a 2021 peak on concerns about the growth outlook of Asia’s largest economy amid growing US-China tensions. The index finished at 5,656.72 last Friday.
Of the outstanding balance worth 18.8 trillion won in HSCEI-linked notes as of December, about 1.2 trillion won was lost during the first two months of this year, clocking an accumulated capital loss rate of 54%, the FSS said.
“Systematic breakdowns led to sales systems that prioritised firms’ profit-making at the expense of consumers’ interests,” the regulator said.
One bank relaxed internal risk management rules that would have mandated slower sales as volatility grew and hiked sales targets instead.
One brokerage recommended high-risk products to investors who said they wanted their principal protected.
Another bank misrepresented the equity-linked products as having recorded no capital losses in the past 10 years, neglecting to disclose losses going back 20 years, the FSS said. — Bloomberg
