Regulators zero in on Woori, Hana CEOs over DLS fiasco

Woori Bank CEO Sohn Tae-seung

By Lee Kyung-min

Woori Bank CEO Sohn Tae-seung and KEB Hana Bank CEO Ji Sung-kyoo will face intense scrutiny over allegations that they deliberately continued to sell high-risk financial products, leading to what has become a full-blown fiasco involving over 822 billion won ($681 million) in “misleading” investments.

According to the Financial Supervisory Service (FSS), Sunday, a team of investigators will look into how the products were developed, structured and sold. Key people involved will be identified for the respective roles and tasks they carried out, and asked whose directives they followed.

The products are derivative-linked securities (DLS) and derivative-linked funds (DLF), structured to track the performance of underlying assets such as interest rates and government-issued bond yields. Their returns are determined by the movements of those assets.

KEB Hana Bank CEO Ji Sung-kyoo

“The investigation will focus on whether management's influence or pressure was at play to prioritize profit over their duty to inform customers of possible risks,” a FSS official said.

“Particular closer attention will be paid to determine why the two banks continued to sell the highly risky products unlike their state-run peers which discontinued the sales immediately after investment risks became notably higher than previously estimated. We will also see how the chain of command worked,” the official added.

Of the 822 billion won ($681 million) invested in the DLS and DLF in question, nearly half was sold by Woori Bank and the other half by KEB Hana Bank; with many investors now destined to incur losses.

Of them, Woori sold DLS worth over 126 billion won linked to the performance of 10-year German treasuries, which are set to incur 95 percent losses.

This means a person who invested 100 million won will lose 95 million won.

Both Woori and KEB Hana maintain investment decisions concerning DLS and DLF were made by executive-level figures, a unified stance to help give Sohn and Ji plausible deniability.

This is the latest development in the ongoing investigation into what investors claim is the “irresponsible marketing” of the risk-prone financial products sold by the nation's top commercial banks.

According to complaints filed with the FSS, many customers claim they were misled by the banks' private banking officials, who they said convinced them that bonds issued by the government of an economic powerhouse like Germany would be unlikely to incur losses.

Many banks with a wealth management division have sold these products to high-end customers, saying they are available only to a limited number.

The FSS will look into the complaints to see if the banks sold the products to customers without making sure they understood what they were about to buy and the possible risks.

Excessive sales pressure

Industry officials say the fiasco resulted from a blind push to generate profits, a key directive from the lenders' management to boost non-interest income.

The push was effective as banks are unlikely to be held responsible for the investors' losses, all the while charging a handsome service fee of between 1 to 1.5 percent of the total sum invested, according to an industry official who declined to be named.

“For example, a customer who bought a 100 million won of DLS should pay between a 1 million won to 1.5 million won fee up front regardless of the products' performance,” the official said.

“If bank officials underperform in sales of such products, they will not be promoted ― not to mention the increased risk of being demoted or moved to a remote branch in a regular reshuffle.”

The fear-driven marketing from the banks has been an effective way for their holding companies to boost service fees that account for a large portion of non-interest income.

Woori Financial Group and Hana Financial Group reported 611.7 billion won and 1.1 trillion won in non-interest income, respectively, in the first six months of 2019.

Of Woori group's income, 565.6 billion won, or 92 percent, came from Woori Bank.

For Hana group, 39 percent, or 438.8 billion won, came from KEB Hana Bank.

However, there have been calls for the financial regulator to push banks to strengthen risk management, a key component of the healthy management of financial groups.

“Risk management is vital to the successful operation of financial groups, which is true for all other industry players,” Kim Sang-kyung, chairwoman of the Korea Network of Women in Finance, said. “Measures need to be taken to keep risk-prone entities in check.”

While banks will not be able to avoid criticism over their lax risk management, consumers should also take greater caution before making an investment decision, according to Korea Institute of Finance research fellow Kim Byung-duck.

“Both the sellers and buyers of financial products should pay more attention to whether they have a clear understanding of what the products are and how high the risk could become,” he said.

“The past incidents of similar sort resulted from overlooking or undermining the possibility of incurring losses. Greater caution is needed so as not to repeat the same mistake,” he added.