3,000 investor complaints prompt FSS to extend ELS probe

Financial Supervisory Service Governor Lee Bok-hyun / Yonhap

The financial authorities will conduct an on-site inspection of banks and brokerages in the days following Korea’s Lunar New Year holiday, market watchers said Sunday.

The extended investigation follows skyrocketing losses from equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI). The performance of the high-risk, high-volatility derivatives tracks 50 shares of Chinese firms traded outside mainland China.

The Financial Supervisory Service (FSS) said that about 3,000 complaints were filed by ELS investors as of Feb. 2.

The HSCEI is hovering at the 5,200 level, less than half of the previous peak of over 12,200 in the first half of 2021. Most of the products were of a three-year maturity type and had begun to report over 50 percent losses since late last year. Some say the losses combined could exceed 7 trillion won this year.

Among commercial lenders subject to the FSS probe from Jan. 8 to Feb. 2 were KB Kookmin, Shinhan, Hana and NH NongHyup. The seven brokerages questioned were Korea Investment, Mirae Asset, Samsung, KB, NH, Kiwoom and Shinhan.

The findings of the probe will be announced next month, detailing the incomplete sales practices and the government's remedy standards.

Stern penalties will be in order, as indicated by Financial Services Commission Chairman Kim Joo-hyun at the Jan. 29 plenary session of the National Assembly Policy Committee.

The top financial regulator said that he agreed with the need to halt the sales by banks of the highly complex structured financial products, including put options.

“We will revise the system upon conclusion of the investigation,” he said.

On Sunday, FSS chief Lee Bok-hyun said that he identified cases of irresponsible sales for the first time since the launch of the investigation.

“We have uncovered some cases of bank sales officials recommending the purchase of the products in question,” he said during a radio interview with local broadcaster KBS.

Large sums of money should not have been invested in high-risk investment vehicles, a key principle the sales officials should have put into practice, Lee said.

“Not incurring loss was the most critical value for the investors, but some sellers of the ELS talked the customers into making risky investments knowing that the money was set aside for cancer treatment. There were some cases where investors’ post-retirement plans could be put at serious risk, if the initial sum of their investment is not returned in full within five years of the investment,” he said.

FSS on-site inspections will begin Feb. 15. “We will determine who should be accountable for losses and how to assign compensation obligations. We will seek to wrap up the whole process before the end of this month.”