FSC chair vows DLF scandal countermeasure

Financial Services Commission Chairman Eun Sung-soo said the financial authority will come up with measures to prevent anything like the recent controversy surrounding high-risk derivative-linked securities (DLSs) and derivative-linked fund investments (DLFs) ever happening again.

Eun said the new measures will be prepared by the end of this month or early November at the latest.

“We apology to the lawmakers and the public for the high-risk financial product sales including DLFs, which recently have been controversial,” Eun said during a National Assembly audit. “We will focus on damage relief on consumers [affected by the DLS products] based on the findings by the Financial Supervisory Service (FSS) and create improvement measures that will prevent similar cases from happening.”

He said the government will look into whether the financial companies that sold the products broke any laws.

On Sept. 19, a group of investors stormed a Woori Bank branch in Wirye New Town in southern Seoul to protest the bank aggressively selling DLF products. Some of the investors claimed that their 100 million won ($84,000) investments were now worth just 30 million won, a 60 percent loss. One of the investors was 90 years old and hadn’t understood the product he was signing up for.

Many of the investors claimed that the bank employees promised that their principle investments would not be harmed while getting a 4 percent interest return, which is higher than the deposit interest.

The investors claimed that the bankers did not properly inform them that the product was high risk.

Many of the investors turned out to be elderly people who not only invested their life savings but also, for many of them, their retirement paychecks.

The investors in Wirye were just a few of those that have suffered heavy losses due to high-risk derivative products that tracked the interest rates of 10-year Germany treasury bonds.

The prices of the Germany treasury bonds surged, and as a result, its interest rate plummeted in recent months compared to when the banks were aggressively selling the products at the end of last year and earlier this year.

Although the derivative products that were sold also followed other foreign interest rates such as the seven-year pound sterling constant maturity swap (CMS) rate and the five-year U.S. dollar CMS rate.

According to the FSS, as of Aug. 7, financial companies sold 822.4 billion won worth of derivative-linked products to 3,654 retail investors and 188 businesses.

Banks accounted for the most as they sold a combined 815 billion won, or 99.1 percent. The rest were brokerages including Yuanta Securities, Mirae Daewoo Asset and NH securities.

Woori Bank accounted for the most, taking up 48 percent of all DLFs and DLSs sold, at 401.2 billion won. KEB Hana Bank trailed behind with 387.6 billion won and KB Kookmin Bank with 26.2 billion won.

The FSS said between Aug. 8 and Sept. 25, 93.2 billion won of investment have been recovered by investors even before the products met maturity. The investors lost 48.9 billion won. Those that collected their investment as it matured took back 29.5 billion won, while losing 18 billion won of their initial investment.

The average investor lost 54.5 percent of their investment.

As of Sept. 25, the balance on the DLFs was 672.3 billion won. Unless the German 10-year treasury interest rate falls any further, the FSS estimated investors will suffer a loss of 52.3 percent of their initial investment, or roughly 351.3 billion won.

Recently, the situation has slightly improved with the German 10-year treasury bond yield at minus 0.59 percent, while the estimated loss that the FSS made on Sept. 25 was based on minus 0.643 percent.

The FSS study, however, has found that nearly half, or 49 percent, of investors were 60 years old or older, while those that are 70 years old or older accounted for 21.3 percent.

“A woman who has worked 14 hours a day and saved up 90 million won over 30 years suffered a loss of 60.1 percent, including the 10 million won she borrowed from her daughter,” Democratic Party lawmaker Koh Yong-jin said during the hearing on Friday.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]