South Korea’s financial regulator said on Monday that it will take action against banks and brokerages involved in the sales of derivative products linked to Hong Kong-listed Chinese stocks.
The Financial Supervisory Service (FSS) said that its investigation found “various cases of illegal and unfair practices” in the sales of equity-linked securities tied to the Hang Seng China Enterprises Index.
Hang Seng China Enterprises Index is a benchmark reflecting the performance of China-based companies listed in Hong Kong.
According to the FSS, these unfair practices include “incomplete sales,” wherein consumers are not provided with all necessary product information, such as contract terms and investment risks.
“The sellers had created an environment for incomplete sales by setting excessive sales targets during a period of growing risks of loss for consumers and promoting all-out sales efforts through inadequate performance indicators while neglecting the sales cap designed to protect consumers,” the FSS said, according to Yonhap News Agency.
The structured notes track the performance of the Hang Seng China Enterprises Index and promise bond-like coupons unless the index drops below a certain level. Its sharp drop early this year has caused huge losses for retail investors.
The FSS estimates losses from the financial products to reach a combined 5.8 trillion won ($4.4 billion) this year. Previously, the financial watchdog said that it was investigating 12 local banks and brokerages.
The FSS said it would punish wrongdoings in investment product sales according to law, such as through sanctions and fines, while also considering their effort to compensate customer losses.
The regulator proposed that financial institutions compensate at least 20 percent of the losses sustained by buyers. The amount of compensation will vary depending on the severity of their breaches, it said.
“The FSS plans to quickly start the dispute mediation process by holding dispute mediation committee meetings on representative cases,” the regulator was quoted as saying by local media.
“Still, each financial institution may start voluntarily compensating consumers based on the proposed compensation rate,” it added.
Earlier this year, the FSS said it had uncovered issues, including banks pressuring employees to sell high-risk, complex financial products that are difficult for retail investors to understand.
According to the regulator, of the 19.3 trillion won (around $14.48 billion) of such notes sold in South Korea, more than a quarter of the stocks were bought by people aged 65 or older.
Naked short-selling of stocks—in which investors short-sell shares without first securing a borrowing arrangement—is prohibited by the Capital Markets Act in South Korea.
