Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Banks could face lawsuits over sales of risky derivatives products
Retail investors demand commercial banks to return their prinpcial during a rally in front of the Financial Supervisory Service in Yeouido, Seoul, Dec. 15, after suffering heavy losses from the banks' equity-linked securities (ELS) products tied to Hong Kong's slumping Hang Seng China Enterprises Index (HSCEI). Yonhap
By Yi Whan-woo
KB Kookmin bears brunt of impact from Hong Kong-linked ELS sales
Five major commercial banks in Korea — KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup — are increasingly at risk of facing lawsuits from customers experiencing escalating losses. These losses stem from the purchase of equity-linked securities (ELS) products linked to Hong Kong's declining benchmark index.
The lenders face complaints from retail investors for the possible mis-selling of fixed-income derivatives products that pay out a return based on the performance of Hong Kong's Hang Seng China Enterprises Index (HSCEI).
The investors on the other hand could suffer heavy losses if the underlying stock index falls below a certain level, usually 50 percent of the price at the time of the ELS purchase, when the products mature.
As of January 12, the principal losses for this year have already reached 106.7 billion won ($81.1 million). This is attributed to the sharp decline in HSCEI-listed Chinese stocks, with over 50 percent of the 210.5 billion won worth of derivatives that matured during this period evaporating.
The botched investment is anticipated to have a more significant impact on investors, particularly as the majority of the three-year maturity ELS products linked to HSCEI are set to mature in 2024. The first half alone will see around 10.2 trillion won of these products reaching maturity.
The HSCEI hovered between 10,000 points to 12,000 points in the first half of 2021, but slid more than 50 percent to remain at around 5,100 points this month.
KB Kookmin Bank is consulting with law firms to brace for potential lawsuits from customers, according to industry sources, Wednesday.
Of the 10.2 trillion won worth products that will mature by June, the five banks combined sold 9 trillion won.
KB Kookmin Bank's exposure amounts to 4.77 trillion won, surpassing the combined total of the other four rivals. NH NongHyup sold 1.48 trillion won, followed by Shinhan at 1.37 trillion won, Hana at 753 billion won, and Woori at 26 billion won.
Whether the four lenders are also preparing for possible lawsuits remains uncertain, the sources said.
An attorney at Jeongse Law said if legal disputes materialize, they are likely to focus on whether the lenders "adequately informed customers to enable them to make informed and rational judgments regarding their investments."
"The sellers will be asked to prove that they sufficiently gave explanations on risks associated with the HSCEI ELS products, mainly on principal losses," he said, asking not to be named.
He said the protection of investors has been underscored recently, referring to punitive measures taken by the financial watchdog as well as the courts against financial services firms, particularly in cases of mis-selling hedge funds operated by the now-defunct Lime Asset Management.
Retail investors faced substantial losses when the redemption of funds worth around 1.6 trillion won was suspended in 2019. This action was taken after Lime Asset Management was accused of selling and operating fraudulent financial products.
The most recent case in favor of investors was in December, when the Seoul High Court ruled that Woori Bank, a seller of the fund, should fully compensate the amount demanded by an individual investor. The lower court only ruled 60 percent of the amount should be compensated.