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| Financial Supervisory Service (FSS) Senior Deputy Governor Won Seung-yeon speaks during a press briefing held at the FSS building on Yeouido, Seoul, Tuesday, on the progress of inspections conducted on financial firms involved in selling and designing certain derivative products that have caused major losses for investors. / Courtesy of FSS |
Poor internal control system blamed for derivative fiasco
By Kim Bo-eun
Woori and KEB Hana Bank engaged in mis-selling of derivative products that caused major losses for investors, the Financial Supervisory Service (FSS) said Tuesday.
They also continued the sales of the derivative-linked fund (DLF) options despite a drop in interest rates of underlying assets, and skipped procedures to determine the risks of the products, the FSS confirmed in a briefing after a month of inspections of the banks and other involved financial firms.
However, the authority did not unveil punitive measures at this point because the inspections are still ongoing.
The FSS said it would conduct additional inspections of the two banks, and take punitive measures against them after the inspections are completed.
"The inspections showed that in the entire process of designing, creating and selling the DLF options, financial firms prioritized their profit over investor protection and were negligent in risk control, had poor internal control systems and engaged in mis-selling," FSS Senior Deputy Governor Won Seung-yeon said at the briefing held at the FSS building on Yeouido, Seoul.
According to the FSS, inspections of sales documents reveal that about 20 percent of the sold options had been involved in mis-selling. However, the number could be higher, given mis-selling is suspected to have taken place through means untraceable by documents. For example, an unqualified staff member may have sold the option to a customer which authorities would not be able to determine through documents alone.
In late August, the FSS began its inspection of the banks, as well as three securities firms and five asset management companies that were involved in product design and sales of the DLF options.
The securities firms are IBK Securities, NH Investment & Securities and Hana Financial Investment. The asset management firms are Ryukyung PSG, KB Asset Management, Kyobo Axa Investment Managers, Meritz Asset Management and HDC Asset Management.
Woori and Hana sold DLF options worth a total 795 billion won to 3,243 investors. Data from the inspection shows a significant percentage of the options were sold to people in their 60s and above ― those in their 60s and above accounted for 48.4 percent and those in their 70s and above accounted for 21.3 percent.
Of the total amount sold, a total 672.3 billion won has yet to be matured. As of Sept. 25, it is estimated that around 351.3 billion won or 52.3 percent of the remaining balance has been wiped out due to a sharp fall in yields on underlying assets, such as German treasuries.
"Many dispute settlement applications came from the losses for older investors, as they in general have a limited understanding of investment products and little opportunity to engage in economic activity to make up for the loss, increasing concern for after-retirement years," the official said.
The key culprit behind financial firms' mis-selling practices were their poor risk management and internal control systems.
For example, one securities firm pushed for the sales of the risky option despite internal warning reports of the product's riskiness.
Also, many banks accepted the back tests that asset management firms ran, without verifying them, and used them to train their sales staff.



































