Financial watchdog expands probes into sellers of HK-tied ELS

Korea's financial regulators are expanding on-site probes into sellers of troubled Hong Kong-linked derivative products to prevent major losses with the products beginning to mature this month.

Investors in a troubled Hong Kong-linked derivative product hold a rally in front of the Financial Supervisory Service office in western Seoul on Dec. 15 ahead of the products' imminent maturity. [YONHAP]

Korea's financial regulators are expanding on-site probes into sellers of troubled Hong Kong-linked derivative products to prevent major losses with the products beginning to mature this month.

The Financial Supervisory Service (FSS) began the probe in December after a group of alleged victims who invested in equity-linked securities (ELS) tied to the Hang Seng China Enterprise Index (HSCEI) reported potential losses with the index plunging to half of its 2021 peak. The on-site probe last month on KB Kookmin Bank, a major seller of the ELS, will be expanded to other financial firms, including Korea Investment & Securities, starting Monday.

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 alleged victims argue they were not adequately informed of the potential losses associated with the fluctuations in the HSCEI.

"We will examine any violations that may have been committed in sales of the products and whether there was any incomplete selling of the products through on-site probes,” said FSS Deputy Governor Park Chung-hyun in a briefing in western Seoul on Friday.

“The HSCEI is highly volatile as it has a high proportion of global investors. That means it's riskier yet has a higher return, which we believe was a motive for the financial firms to sell the products heavily.”

The probed banks are KB Kookmin, Shinhan, Hana, NongHyup and Standard Chartered Bank Korea. The probed brokerage firms are Korea Investment & Securities, Mirae Asset, Samsung, KB, NH, Kiwoom and Shinhan.

"Sellers should have curbed the sales of high-risk ELS products in early 2021 considering the crisis in Hong Kong securities and the sellers’ standards, but they increased the sales limit to expand commission profits,” the FSS said, noting former U.S. President Donald Trump's executive order to deter U.S. investment firms from buying shares of Chinese companies.

The HSCEI includes the 50 largest Chinese companies that trade on the Hong Kong Stock Exchange.

The balance for sales of the HSCEI-linked ELS stood at 19.3 trillion won ($14.7 billion) as of November with 15.9 trillion won from banks and 3.4 trillion won from brokerage firms. Combined, there are more than 400,000 accounts, with 22 percent held by investors aged 65 or above.

The FSS will speed up compensation plans for the alleged victims.

"We plan to confirm the compensation standards as quickly as possible as damages will continue to occur,” Park added.

Almost 80 percent of the balance for the ELS products mature this year, with more than half of the balance, or 10.2 trillion won, maturing in the first half.

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