Watchdog cracks down on China-linked notes
Firms to be held accountable for any illegal activities
SEOUL: South Korea’s regulator is launching a wider probe into local banks and brokers that sold exotic notes linked to Chinese stocks amid concerns that the securities may saddle investors with heavy losses.
Authorities have started investigating 12 institutions to determine if there was any wrongdoing over the sale of equity-linked securities that are tied to the Hang Seng China Enterprises Index (HSCEI), according to a statement from the Financial Supervisory Service (FSS).
The biggest sellers among the firms to be probed are KB Kookmin Bank and Korea Investment and Securities Co, it said.
The watchdog said it uncovered several issues during a two-month inspection, including the practice of pushing bankers to aggressively market high-risk notes that are hard for retail investors to understand.
The firms will be held “strictly accountable” for any illegal activities, according to the statement.
Huge losses will materialise as about 15.4 trillion won worth of the equity-linked securities mature this year starting this month, the FSS said.
Roughly 20% of them will come due in the first quarter and another 32% in the following three months.
Even if the banks had systems in place, “we are not sure whether they did their duty to explain the product in a way that’s easy to understand, or whether customers just clicked and signed the contracts to buy something without knowing exactly what it is,” FSS governor Lee Bokhyun told a press briefing.
The probe shines the spotlight on investing trends in South Korea where an insufficient pension system and a general penchant for risky trades have prompted retail investors to pile into highly speculative bets.
Authorities are now seeking to address the situation, with regulators creating a team to manage potential investor complaints related to possible losses from the equity-linked notes.
The securities, which promise bond-like coupons and early redemptions unless the underlying assets drop below a certain level, have lured the country’s elderly during the low interest rates era.
Investors often overlook the risk that once that threshold is breached, losses can be magnified.