Kookmin Bank faces additional fines over overseas property funds after HK-linked ELS scandal
Customers are seen at the face-to-face service counters of KB Kookmin Bank’s Yeouido branch in Seoul, Nov. 24. Yonhap
KB Kookmin Bank, already facing potential hefty fines over the improper selling of equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index in Hong Kong, is also at risk of severe penalties related to its sales of overseas real estate funds, financial authorities and industry officials said Monday.
The Financial Supervisory Service (FSS) completed inspections in October of three distributors of the so-called Belgium real estate fund — Korea Investment & Securities, KB Kookmin Bank and Woori Bank — and is currently compiling its findings.
The Belgium real estate fund, created in 2019 by Korea Investment Real Asset Management, was a public offering designed to generate returns from rental income and capital gains on property sales. However, growing uncertainty in Europe’s property market, coupled with sharp interest rate hikes, hindered asset sales and ultimately wiped out all invested principal.
Kookmin Bank is alleged to have violated the suitability principle by misclassifying the risk level of this high-risk product. Under the suitability rule, financial institutions must evaluate a customer’s risk tolerance and financial circumstances, and are barred from recommending or selling products that are unsuitable for that customer’s profile.
The bank labeled this fund — along with another overseas real estate fund — as Grade 2 rather than Grade 1, despite the products being ultra-high-risk with the potential for a total loss of principal.
This misclassification allowed customers who would normally be barred from the highest-risk investments to purchase the products. As a result, all contracts involving clients who should have been restricted from Grade 1 products are likely to be treated as breaches of the suitability requirement.
Notably, this error was not an isolated mistake by a single branch or employee but a fundamental error originating at the head office level, which is expected to weigh heavily against the bank.
“Incorrectly labeling the product’s risk clearly violates the rules,” an FSS official said. “Since the mistake originated at the head office rather than with an individual staffer, the bank will have little grounds to contest this finding.”
Kookmin Bank is currently conducting voluntary compensation talks with affected customers. Compensation amounts range from 40 to 80 percent, and about 70 percent of investors have already been reimbursed.
The bank was already facing potential hefty fines over the ELS mis-selling.
On Nov. 28, the FSS issued preliminary fines totaling around 2 trillion won to five banks — Kookmin, Shinhan, Hana, NH NongHyup and Standard Chartered Bank Korea — marking the largest penalties since the Financial Consumer Protection Act took effect in 2021.
Kookmin Bank, which had the highest ELS sales among the five, reportedly received a preliminary fine of about 1 trillion won.