Korean Banks Under Fire for Misleading Retirees on Risky China-Linked Investments

South Korea's financial regulators have unearthed unsettling practices by some of the country's financial institutions. Following a detailed probe into the matter, it was found that several major banks and brokerage firms have been involved in the deceitful sale of high-risk investment products linked to the Chinese markets to unwitting retail investors, prominently the elderly. These products, based on the performance of the Hang Seng China Enterprises Index, have put the investors' capital at significant risk.

Widespread Misconduct Uncovered

The Financial Supervisory Service (FSS) conducted an extensive investigation into the sale of these structured products by five banks and six brokerages. The findings revealed substantial regulatory noncompliance and institutional failures. Should the Hang Seng China Enterprises Index remain at its current level, estimated losses could reach a staggering 5.8 trillion won (around US$4.4 billion) this year.

Consequences for Financial Firms

In light of these revelations, the FSS is considering punitive measures including fines, influenced by the level of compensation these firms offer to their clients and the efforts to restore trust. Notably scrutinized were Kookmin Bank, Shinhan Bank, Korea Investment & Securities, and Mirae Asset Securities, all accused of potential rule violations and misrepresentation of these complex financial products.

The Popularity and Pitfall of Structured Products

Structured products tied to the Hang Seng China Enterprises Index were once a popular choice among South Korea's retirees, with sales reaching new heights in 2021. However, the following market downturn led to a sharp decline in the index's value, revealing the vulnerability of these investments. As of December last year, the outstanding balance of these HSCEI-linked notes totaled 18.8 trillion won. In just two months, investors faced a harrowing capital loss rate of 54%, as stated by the FSS.

Flawed Sales Practices

The FSS has identified multiple instances of malpractice, from one bank disregarding internal risk management in pursuit of higher sales, to brokerages inappropriately advising risk-averse customers to purchase these high-risk notes. Additionally, one bank falsely promoted these products as safe by not disclosing past losses. These revelations come despite strengthened consumer protection laws established in 2021 meant to safeguard retail investors from such unscrupulous practices.

Handling the Aftermath

The implicated banks have since ceased sales of equity-linked securities amid mounting capital loss concerns and regulatory actions. Steps are being taken to compensate affected investors, which will likely impact the financial results of these firms for the first quarter. Further guidelines are being drafted by regulators to determine fair compensation and commence a conflict resolution process starting April. Additionally, the FSS plans to revise the regulations for the sales of intricate financial products to retail investors.

SouthKorea, Banks, Investigation