Value context and insight. lkm@koreatimes.co.kr
'Investor-specific' sales practice under scrutiny amid HK-tied ELS losses
2nd round of FSS on-site inspection begins
Financial Supervisory Service Governor Lee Bok-hyun / Yonhap
By Lee Kyung-min
The financial authorities will look into whether sellers of troubled Hong Kong-tied financial derivatives fulfilled an obligation to recommend investments suitable for each retail investor based on the purpose of their investment, asset status and investment experience, according to market watchers, Tuesday.
The country’s five commercial lenders — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — and six brokerages sold the equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI). The high-risk, high-volatility index encompasses stakes in 50 Chinese firms traded outside mainland China.
More investors will incur losses in the coming months, given the maturity of a combined 15.4 trillion won ($11.5 billion) worth of three-year securities sold mostly in 2021. Up to 7 trillion won in losses are certain unless the current 5,000 level gains at least 60 percent of the previous peak of over 12,200 in the first half of 2021.
The five commercial lenders have incurred a combined loss of 522 billion won from Jan. 1 to Feb. 7, raising the loss rate to 53.6 percent.
According to market watchers, almost all banks and brokerages will be held liable unless they can prove that they made sure buyers fully understood the risks associated with the highly volatile, complicated financial investment vehicles in advance.
Recommending the high-risk derivative to retirees whose priority is the stable management of retirement funds, for example, is a violation of the consumer protection principle.
Similarly, the sales of the derivatives will be declared irresponsible if the sales representatives failed to fully explain the possibility of loss, such as by comparing the volatile products to savings accounts.
However, the sellers maintain the obligation was met since the buyers were notified of the risk ratings of each product in advance. They also say the final sales were made in accordance with investor tendencies, as measured by a survey of each investor on their risk preferences and investment objectives.
Financial Supervisory Service Governor Lee Bok-hyun called on the banks to come up with compensation plans, Feb. 5.
“It will be desirable for the financial services firms in question to present compensation packages of their own apart from the authorities’ guidelines,” Lee said. The obligation would be considered breached, the financial regulator stressed, if the sellers sold the products without following protocol.
This was in reference to sales officials, many of whose strategies rely on the blind trust of customers in the well-established financial service providers.