Banks, brokerages under probe over HSCEI-tied ELS mis-selling suspicions

Financial Supervisory Service Governor Lee Bok-hyun / Korea Times file

The financial authorities have launched an investigation into the country’s top commercial lenders and brokerages over the irresponsible sales of equity-linked securities (ELS), high-risk derivatives tied to the performance of the Hang Seng China Enterprises Index (HSCEI), market watchers said Sunday. The highly volatile index encompasses 50 shares of Chinese firms traded outside mainland China.

Propelling the intense scrutiny is investors' combined losses of 8.3 billion won ($6.3 million) in the latter half, a figure certain to exceed 3 trillion won in the first half of next year.

Most of the three-year maturity products were sold in 2021, when the index soared to around 12,000 points, but the figure has since halved to about 6,000 points as of end of November. The over 8.4 trillion won worth of the derivatives sold by the country’s top five banks — KB Kookmin, Shinhan, Hana, Woori and NongHyup — will reach maturity by next June.

The development bears a striking resemblance to the mis-selling of derivative-linked funds (DLFs) sold by the same banks and brokerages a few years earlier. Many investors at the time suffered a significant reduction in or altogether loss of their initial investment. Both the DLFs and the HSCEI-tied products are defined by extreme market volatility.

The findings of the investigation will be determined largely by whether the sellers of the questionable derivatives are able to allay suspicions that their priorities were almost exclusively about short-term profit generation at the expense of elderly customers.

An investigation by a team of Financial Supervisory Service (FSS) officials is ongoing at KB Kookmin Bank over a possible loss of nearly 5 trillion won ($3.83 billion) that it could potentially inflict on its customers, according to industry sources, Friday.

Hana, Shinhan, Woori and NongHyup have submitted documents requested by the FSS. A handful of brokerages including Mirae Asset Securities and KB Securities are undergoing a similar process.

The officials are looking into whether the derivatives were sold after the sellers confirmed the high-risk products could incur losses and their returns could be substantially lower than the initial investments. Also at issue is whether and by how much retail sellers at the banks and brokerages were given high evaluations in their performance reviews for boosting sales of the questionable products.

Of the combined outstanding balance of 8.41 trillion won set to reach maturity in the January-June period of next year, KB Kookmin will see over 4.7 trillion won, followed by NongHyup (1.48 trillion won), Shinhan (1.37 trillion won), Hana (752.6 billion won) and Woori (24.9 billion won).