FSS considers compensation plans for Chinese stock losses

Financial regulators are reviewing compensation plans for the alleged victims who invested in derivative products tied to Chinese stocks amid growing concerns for massive financial losses, according to local media reports.

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a meeting with the chiefs of asset management companies in Yeouido, western Seoul, on Nov. 29. [NEWS1]

Financial regulators are reviewing compensation plans for the alleged victims who invested in derivative products tied to Chinese stocks amid growing concerns for massive financial losses, according to local media reports.

The goal is to swiftly mediate the registered disputes that are expected to grow once losses start to be realized when the products mature in the first half of next year.

The Financial Supervisory Service (FSS) is probing banks and brokerage firms that sold equity-linked securities (ELS) tied to the Hang Seng China Enterprise Index (HSCEI).

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 HSCEI serves as a benchmark that reflects the performance of mainland Chinese companies that are listed in Hong Kong. The index has plunged to half of its 2021 peak.

The FSS plans to establish a standard around a compensation ratio for financial companies that sold the ELS, according to the reports.

More than 40 disputes related to the ELS were registered with the FSS to be mediated as of last week.

The alleged victims, who are largely older citizens, argue they were not adequately informed of the potential losses associated with the fluctuations in the HSCEI.

The FSS did not deny its review over the compensation plans, but said the regulator is still in the stage of confirming whether the financial companies involved did not provide adequate information about the products to the investors.

“We’re still in the stage of confirming whether the information is true, so details of the establishment of the standard for compensation is still some stages away,” said an official from the FSS.

The FSS had ordered financial companies to compensate between 40 to 80 percent of losses incurred to investors of Lime and Optimus funds for incomplete sales.

The FSS Gov. Lee Bok-hyun criticized financial companies over their sales of high-risk products to older customers in a meeting with the chiefs of asset management companies last week.

Lee said the financial companies should be reviewed on whether it was appropriate to recommend high-risk products with chances of incurring losses of the principal to older customers. He added that it would be difficult to spare them of the responsibility for the losses even if the investors said they understood the products as the explanation often tends to be a formality that is difficult to understand.

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