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FSS to probe banks for misleading investors

Aug 26,2019
Financial authorities are launching a special investigation into Woori Bank and KEB Hana Bank for possibly misleading investors when selling derivatives-linked funds (DLFs).

Thousands of investors who purchased DLFs for their stable profitability and mild financial risk are about to lose a total of around 1 trillion won ($824.7 million) as major countries’ benchmark interest rates are not expected to rise anytime soon.

Local media reported Sunday that the Financial Supervisory Service (FSS) began an investigation into banks, securities companies and asset managers on Friday as investors who bought DLF products based on the interest rates of major countries are expected to lose up to 95 percent of their principal.

DLFs, a package of derivatives-linked securities (DLSs), are financial products of which returns are determined by movements of underlying assets such as interest rates and government-issued bond yields.

The DLFs in question are structured with 10-year treasury bonds of Germany or with DLSs linked to the U.K. pound seven-year constant maturity swap (CMS) rate and the U.S. dollar five-year CMS rate.

The yield for Germany’s 10-year bonds has fallen from 0.242 percent on January 1 to -0.678 percent as of Friday’s close.

The dollar five-year CMS rate nosedived from 3.209 percent reached in November last year to 1.360 percent in mid-August, and the rate for the pound dropped from 1.639 percent in October last year to 0.640 percent last month.

While these products usually guarantee an annual return rate of between 3.5 percent and 4 percent when the designated countries’ benchmark interest rate stays within a certain range until maturity, if the rate falls beyond that margin, investors could lose most, if not all, of their money.

From this incident, 3,654 retail investors and 188 institutions are faced with losing more than a total of 1 trillion won by mid-September, the expiration deadline set for the DLFs. While there could be a chance that those rates recover above the set margins by maturities, local analysts have said that is highly unlikely.

More than 126.6 billion won of funds from Woori Bank’s German bond-related DLFs are in the negative terrain. KEB Hana Bank, which did not sell German bond-related DLFs, said it stopped selling DLFs based on dollar and pound CMS rates in early March, as it expected Washington to freeze its benchmark interest rate.

While local securities firms have sold a total of 822.4 billion-worth of DLFs to Korean investors, Woori Bank and KEB Hana Bank are being investigated by the FSS because they have sold the most.

As of last Tuesday, Woori Bank has sold 401.2 billion won worth of DLFs, while KEB Hana Bank has sold 387.6 billion won worth.

The FSS is especially focused on why the banks continued to sell the DLFs even though the related interest rates were falling. It believes that high level officials from those banks could have been involved in forcibly selling the DLFs to local investors.

The financial authority added it will look into possible regulatory fixes while examining whether these financial firms violated laws in selling the problematic investment products.

In a separate case, the FSS is launching an investigation Monday to look into requests for mediation in disputes between banks and investors.

The organization is focused on verifying whether the banks did not properly alert customers about the risks of the DLFs in question.

The Financial Consumer Agency said Thursday it will report Woori Bank CEO Son Tae-seung and KEB Hana Bank CEO Ji Sung-kyu to the prosecution for fraud.

Woori Bank declined to comment regarding the case on Sunday. KEB Hana Bank did not respond to calls for comment on Sunday.

BY KO JUN-TAE [ko.juntae@joongang.co.kr]