Foreign banks benefit from DLF, Lime catastrophe

By Kim Bo-eun

Most major Korean banks have become mired in a series of investment scandals involving the sale of high-risk, high-return products that have caused major losses for investors.

This has led to many people seeking more reliable institutions to manage their assets. Foreign banks here, which are free from involvement in the DLF and Lime cases, have benefited from the situation.

A growing number of individual investors, particularly the wealthy, have pulled their money out of local banks, and moved to foreign banks that they believe will manage their assets in a safer and more systematic manner.

Woori and KEB Hana Bank currently face sanctions for having mis-sold derivative-linked funds (DLFs) last year that led to large scale losses for investors. They also face allegations of failing to notify investors of the risks of investing in funds managed by Lime Asset Management for which redemptions have been halted. Shinhan faces the same allegation as the two banks in mis-selling investment options managed by Lime.

The fiasco over DLF options began in the latter half of last year, and allegations surrounding Lime Asset Management began surfacing around the same time.

Data shows new wealth management customers at Standard Chartered (SC) Bank Korea from January through November last year grew 28 percent year-on-year. Citibank also saw the number of new wealth management customers grow 50 percent in the same period. The scale of Citibank's retail investors' assets last year grew 24 percent.

"We had many customer inquiries in the latter half of last year," an SC Bank official said. "We believe this is based on the bank's strict compliance standards."

SC Bank not only examines an investment option, but also the asset manager or brokerage that designs the option.

Citibank is known to have a system that ensures investment diversification. This is included in the performance evaluation of private bankers.

"The key performance indicator not only measures sales achievements but also consumer protection," a Citibank official said.

"We did focus on wealth management since the beginning of the year, but the growth in new customers is seen to be partly due to the DLF, Lime cases as well.”

Both banks said they decided not to sell the troubled investment options after examining them according to their screening standards.

Local banks have sold the options without sufficient warnings of associated risks due to sales pressure amid growing competition amid a tough market situation for lenders.

Shinhan Bank, the flagship firm of Shinhan Financial Group, the nation's largest financial group by assets and profits, is suspected of promoting the troubled funds managed by Lime as its brokerage unit is alleged to have worked closely with Lime in enabling the sale of the options.

An official at a local bank said, “We have been keeping an eye on wealth management customers, many of whom are our long-term clients, as their assets have been on a gradual decline.”