FSS chief lashes out at banks over ELS sales

Financial Supervisory Service (FSS) Governor Lee Bok-hyun speaks during a meeting with heads of asset management companies in Seoul, Wednesday. Yonhap

Financial Supervisory Service (FSS) Governor Lee Bok-hyun strongly criticized banks over their possible mis-selling of equity-linked securities (ELS) products, as large-scale losses are expected during the first half of next year due to the plunge of the Hang Seng China Enterprises Index (HSCEI).

The head of the state-run watchdog agency said banks hold some accountability over the problematic sales of these products, although the banks claimed that they followed thorough legal procedures that are required for selling such high-risk products to customers.

“Regardless of whether banks have followed legal procedures in providing explanations to investors, I think we need to review whether such banks acted appropriately, and closely examine whether it was appropriate to recommend such high-risk products that could result in huge losses to senior citizens mostly in their 70s who simply wish to reinvest their retirement savings safely," Lee told reporters after attending a meeting with the heads of asset management companies in Seoul, Wednesday.

Since earlier this month, the FSS has been conducting on-site inspections on KB Kookmin Bank, which has sold the largest portion of ELS products in the country so far. The watchdog agency plans to expand the investigation over other major banks, including Hana, Shinhan, Woori and NH NongHyup, as well as key brokerages.

Lee stressed that his agency will review whether banks have complied with the principle of suitability: "The purpose of the principle of suitability under the financial consumer protection act is that financial institutions are obliged to understand a consumer's situation accurately and to recommend products that are suitable for the purpose of subscription," Lee said, adding that there are doubts whether the principle was properly observed by banks, considering that a large amount of ELS products were sold mostly to senior citizens at a particular period of time.

He went on to lash out at banks, saying that even he cannot easily read the information of the products in question and thus, he is highly suspicious as to whether the banks could be exempt from any responsibilities, just because they followed all procedures required for the sales of such products.

KB Kookmin Bank alone sold nearly 8 trillion won ($6.2 billion) worth of ELS products that are tied to the HSCEI to clients out of the entire sales amounting to 20.5 trillion won, as of June this year. Shinhan, Hana, NH NongHyup and Woori followed the list, as they sold ELS products amounting to 2.3 trillion won, 2.17 trillion won, 2.13 trillion won and 41 billion won, respectively.

With the index plummeting to only 50 percent of its peak, large losses are expected as expirations occur in the first half of next year.

NH NongHyup Bank headquarters in central Seoul / Courtesy of NH NongHyup Bank

With the possibility of large-scale losses looming large, NH NongHyup Bank stopped selling ELS products at its branches nationwide last month.

It was the first time that a commercial bank has taken a measure to suspend ELS sales amid growing concerns over the massive losses expected to be incurred during the first half of next year due to the plunge of the Hong Kong index.

"As ELS products that use the HSCEI as an underlying asset are expected to suffer losses due to the plunge of the index, the bank has decided to stop selling products with even the slightest chance of principal loss starting last month,” an official from NH NongHyup Bank said.

Other local banks are still examining whether to stop selling ELS, including KB Kookmin Bank and Hana Bank. A KB Kookmin Bank official told The Korea Times Wednesday that the bank is currently considering the matter.

Shinhan Bank and Woori Bank said they had already stopped selling equity-linked products that are tied to the HSCEI as underlying assets since late last year.

"At Shinhan Bank, we sell them in the form of either an equity-linked fund (ELF) or equity-linked trust (ELT). But the sales of both ELF or ELT products that are tied to the HSCEI have been suspended since last November," an official from Shinhan Bank explained.