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Financial scandal rocks South Korea: Banks and brokers face major probe!


Financial scandal rocks South Korea

The South Korean financial regulatory body is set to initiate a comprehensive investigation into a number of banks and brokerage firms. This move arises from concerns over exotic financial products linked to Chinese stocks, which potentially could lead to substantial financial losses for investors. Starting Monday, the probe will scrutinize 12 financial institutions to determine if there were any instances of misconduct related to the sale of equity-linked securities tied to the Hang Seng China Enterprises Index. Notably, KB Kookmin Bank and Korea Investment & Securities Co. are identified as the major distributors of these products.


During a meticulous two-month review period, the Financial Supervisory Service (FSS) discovered several problematic practices. It found that some institutions were excessively pushing their banking staff to aggressively market complex and high-risk financial products. These products are often difficult for the average retail investor to fully grasp. The regulatory authority has made it clear that it intends to enforce stringent accountability measures for any illegal activities that are uncovered during this investigation.



The potential for significant financial impact is substantial, as securities worth around 15.4 trillion won (equivalent to approximately $11.7 billion) are set to mature over the current year, beginning in January. About 20% of these securities were due in the first quarter, with an additional 32% set to mature in the second quarter. This clustering of maturity dates raises concerns about the potential volume of losses if the market conditions are unfavorable.


Governor Lee Bokhyun of the FSS expressed concerns during a press briefing about the effectiveness of the systems banks have in place to ensure proper communication to customers about the products they purchase. He highlighted the uncertainty regarding whether banks fulfilled their duty to make these complex products understandable or if customers merely rushed through the purchasing process without a clear understanding of what they were buying.



The ongoing investigation highlights a growing trend in South Korea where the lack of a robust pension system and a general inclination towards high-risk investments has led many retail investors to engage in speculative financial activities. The authorities are stepping up efforts to manage this trend by establishing a team specifically tasked with handling potential complaints and issues arising from losses associated with these high-risk equity-linked securities.


The securities in question are designed to be attractive to investors, especially older adults, by offering returns similar to those of bonds and possibilities for early redemptions, assuming the underlying assets do not fall below a specified threshold. However, this design introduces a significant risk of substantial losses if the asset values drop below the agreed-upon levels, which has become a more pressing concern given the current market conditions.


The sales of these products were most aggressive in 2021, at a time when the Hang Seng China Enterprises Index was significantly higher than it is currently. The index has since dropped to less than half its peak value, greatly increasing the risk of loss for those holding these securities. This situation is exemplified by a product named "Multi Barrier Lizard" offered by Korea Investment & Securities, which is due to mature soon and has not met performance expectations due to the severe drop in the index.


The FSS revealed that the total market value of notes tied to the HSCEI stands at 19.3 trillion won, with an overwhelming majority, 91%, being held by retail investors. Within this demographic, approximately 30% are seniors aged 65 or older, highlighting the vulnerability of this group to potential financial losses as reported by Bloomberg.



There are about 400,000 accounts associated with these equity-linked products, and the FSS has already received a significant number of complaints from retail investors who are dissatisfied or concerned about their investments.


On the financial markets, the responses of shares of the involved financial institutions were mixed. While KB Financial Group Inc. saw a brief uptick in its stock value, Korea Investment Holdings Co., the parent company of Korea Investment & Securities, saw its stock price decline.


Darren Kang, a chief investment officer at Life Asset Management Inc., pointed out that the financial markets have already adjusted to reflect the potential negative impacts of these equity-linked products. He also noted that the performance of these financial stocks is currently more influenced by broader economic discussions, such as the restructuring of debts by distressed builders within the country.


30.04.2024



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