Financial watchdog to begin another probe into Hong Kong-tied ELS

Financial Supervisory Service Gov. Lee Bok-hyun speaks in a meeting held to support ordinary citizens and the self-employed in central Seoul on Jan. 15. [NEWS1]

The Korean financial watchdog will launch an additional probe into the sellers of the troubled Hong Kong-tied derivative financial products after they were found to have sold the products without providing sufficient explanation to investors.

“The investigation is not yet finished, but we have confirmed cases of incomplete or inappropriate selling” of the equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index (HSCEI), Financial Supervisory Service (FSS) Gov. Lee Bok-hyun said in a televised show on Tuesday.

It was the first time the FSS confirmed that sellers sold the products without giving a proper explanation to investors.

ELS are a type of debt instrument with variable payments linked to an equity market benchmark. Their returns are linked to the upward and downward movements of the underlying stock.

The FSS initiated an on-site probe into sellers of the Hong Kong-tied ELS last month, including banks and brokerage firms, as the HSCEI has plunged to half that of its 2021 peak ahead of the maturity of the products. More than 10 trillion won ($7.56 billion) worth of the products are maturing in the first half of the year.

“There were cases in which a customer, who prioritized the protection of the principal, was recommended” for the Hong Kong-tied ELS. Lee explained that such investors included those who received insurance compensation for cancer and needed the funds for treatment in the near future, and those who needed the principal back in three to five years.

The FSS probe into the sellers of the products was scheduled to end on Feb. 2 after it initiated an on-site probe into major sellers of the products, which included five banks — KB Kookmin, Shinhan, Hana, NongHyup and Standard Chartered banks — and seven brokerage firms, including Korea Investment & Securities, Mirae Asset Securities, Samsung Securities and Kiwoom Securities.

“We will begin the second round of on-site investigations between Feb. 15 and 16,” Lee added.

The financial watchdog plans to announce the probe outcome as early as this month and come up with compensation plans for the investors, while encouraging financial companies to voluntarily compensate the investors.

Some banks temporarily suspended sales of the ELS following the news.

KB Kookmin and Hana banks recently announced they would temporarily halt the sales of entire ELS products amid volatility in the global financial market. It noted the particular concern about Japan’s Nikkei index that recently hit a 33-year high on the surge of tech stocks. NongHyup bank suspended the sales of the products from October.

BY JIN MIN-JI [jin.minji@joongang.co.kr]