Woori, Hana face probes for mis-selling allegations
The Financial Supervisory Service (FSS) is set to inspect Woori and KEB Hana Bank later this week over suspicions of mis-selling derivatives linked funds (DLFs) that are expected to incur huge losses for investors.
DLFs are comprised of derivatives-linked securities (DLSs). DLSs refer to financial products structured to track the performance of underlying assets such as interest rates and government-issued bond yields. Their returns are determined by movements of those underlying assets.
The two banks are estimated to have sold about 1 trillion won worth of DLFs from March through May this year.
The DLFs that have come under scrutiny are those comprised of DLS products that have been tied to yields on Treasury bonds of Germany, the U.K. and the U.S.
Investors of these funds, especially those comprised of DLS products whose returns are determined by the performance of Germany’s state bonds, are facing a loss in principal.
This is because German bonds’ yields have fallen in line with economic contraction in the European country.
Products with the greatest risk are those tied to 10-year German Treasury bond yields.
Investors get 4 to 5 percent in returns if the yields do not fall below -0.2 percent. However, if the yield falls below -0.2 percent, the investor faces losses 200 times the difference in interest rate.
If the interest rate at the maturity point is -0.3 percent, the investor will face a 20 percent loss of the principal.
Last week, the yield on 10-year German bonds went below -0.7 percent. At this is the point investors face a 100 percent loss in principal.
The first date of maturities for investors of the DLFs falls on Sept. 19.
They are likely to lose their principals, as it appears unlikely the bonds’ yields will see a sharp rise in the next month.
Among the purchasers of these products were not only institutional investors, but also individuals who invested their retirement funds.
The banks are suspected to have sold the products, providing misleading information on investment yields despite uncertain circumstances.
The two banks that sold these products are facing criticism because other major commercial banks decided not to sell them based on growing uncertainties in the market.
Bond yields of major economies started falling at the time the banks began selling the DLFs.
KB Kookmin and Shinhan ruled out selling these types of products, due to the associated risks.
The Industrial Bank of Korea halted sales of such products this year, after selling 200 billion won worth of them from 2016 to 2018.
Woori Bank, meanwhile, sold 126.2 billion won worth of the DLF with German bond yields as the underlying asset.
When losses to the principal started reaching 30 percent to 40 percent, customers’ inquiries on reselling are reported to have surged.
But only 1.5 percent of the total amount of DLFs were resold, raising questions over how Woori responded to the inquiries.