The rage of a woman in her 70s

Kim Chang-gyu

The author is the economic news editor of the JoongAng Ilbo.

Park Jung-sook (a pseudonym) is 75 years old, without a husband or children. She worked hard during her younger days to save up for her old age since she does not have anyone to depend on. She earned enough wealth to purchase an apartment, but could not stop worrying about her condition should she fall ill. So, she rented out her apartment and moved into a cheaper two-room unit in a multifamily residence. She hardly dined out and lived as frugally as possible to save money.

She finally took comfort in the numbers building in her bank account. As she placed all her non-property assets in the bank, she was treated as a VIP by her bank. About 30 months earlier, she received a call from her banker, who wished to introduce her to a novel investment that would generate much greater returns than her deposit.

Bank deposit at the time produced yields in the 1-percent range amid ultra-low interest rate under the pandemic. She was told the new product would return an annualized interest of 3 to 4 percent. She thought the extra money could add comfort to her everyday life. She could not comprehend how the product actually works, as the only finance she knew was to deposit and withdraw money from the bank. The only part she understood was that the product yields well and was safe. She signed the paper work just as a “formality,” as the banker said. She ended up shifting all her bank deposits into the unfamiliar account.

She felt the entire world was crumbling down when she heard last December that she might redeem just half of her money when the product matures six months later. Her money was placed in equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index (HSCEI). The derivative product delivers the principal and returns if the underlying asset value does not fall below a certain level by the time it matures. The H-shares representing mainland Chinese companies currently hover just above 5,000, halved from the peak of over 12,000 when the product was sold in 2021. She rushed to the banker to complain that he never told her about the possibility of losing the principal. The staff claimed that as he fully explained about it, she signed it. Park was dumbfounded, vaguely recalling signing her name in several sections as a “formality.”

The misery of Park underscores the outdatedness — and fragility — of the Korean financial system. On paper, Park appears to have been fully aware of the risk tied to the exotic derivative instrument. But laws designed to protect financial consumers do not help at all. According to the Financial Consumer Protection Act, a financial service provider must keep to six obligations when recommending an investment. Service providers must fully explain the product and weigh its suitability as well as appropriateness for the client. Unfair, forcible or other irregular forms of selling, and falsified or exaggerated marketing are forbidden. Incompliance in any one of them is considered as misselling. We cannot know how many of the obligations had been met when the product was sold to Park. The deal seems legal on paper, but in reality, it was most likely illegal.

Some financial institutions evaluate staffers’ key performance based on their sales of high-risk high-return instruments. The products were sold without any limit. Staffers under pressure for performance cherry-picked elderly customers who are generally ignorant of financial complexities and hoarded cash. As of Nov. 15, 2023, ELS tied to H-shares sold to people 65 or over amounted to 5.4 trillion won ($4 billion), taking up 30.5 percent of the total 17.7 trillion-won worth sold to individual investors. HSCEI-linked ELS maturing this month logged a loss rate of more than 50 percent. As much as 15 trillion-won worth is to mature by the year’s end.

Financial institutions cannot be entirely blamed. Pressures on performance, isolation of elderly clients from financial developments, and negligence by authorities all played a part. It is why financial misselling persists. After every blowout — KIKO derivatives in 2008, subordinated bonds of mutual savings banks in 2011, and commercial papers of Dongyang Group in 2013, for instance — financial authorities scurried to devise countermeasures. But the list just added up.

The diffusion of digitalization in financial trade helped accelerate the isolation and exploitation of older adults. Developed economies have been rolling out measures to include older adults in digital finance. The United States in 2018 enacted the Senior Safe Act to prevent financial abuse of the elderly, while the United Kingdom in 2019 laid out guidance for fair treatment for vulnerable financial consumers. The only effort Korea made was to have financial service providers visit centers for elderly citizens to explain effective ways to avoid voice phishing and claim back the money that was mistakenly sent. Given such dismal terms, you can hardly attribute the ELS crisis to individual negligence.