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Record fines for banks pitching risky products

Woori and Hana levied billions for misselling derivative instruments
Feb 14,2020
Woori Bank and Hana Bank have been fined for their aggressive selling of derivative investments, receiving the largest monetary penalties ever meted out by the Financial Services Commission (FSC).

The fine was smaller than that initially proposed.

On Wednesday, the Securities and Futures Commission (SFC), which is under the FSC, held a meeting where it decided to fine Woori Bank 19 billion won ($16 million) and Hana Bank 16 billion won for failing to properly disclose the risks of investing in derivative products.

The SFC proposed the penalty be submitted to the FSC on Feb. 19, while the FSC has said it wants to wrap up its work on the derivative-linked fund (DLF) fiasco in March before the Woori Financial Group shareholder meeting March 24.

At the meeting, shareholders will decide whether to approve the extension of the term of Group Chairman Son Tae-seung,

The Financial Supervisory Service (FSS) earlier suggested a 23 billion won fine for Woori Bank and a 26 billion won fine for Hana Bank. It also recommended ordering the temporary suspension of some bank operations.

Woori Financial Group Chairman Son and Hana Financial Group’s Vice Chairman Ham Young-joo also received disciplinary warnings. Under the terms of these reprimands, they are not allowed to run for their posts again for up to five years.

The lower fines raise concern that the regulator is favoring the banks.

The FSC defended the SFC’s decision, emphasizing in a statement released Thursday that the decision follows the law.

The SFC’s penalty is actually a downgrade from the one initially proposed by the FSS. While the SFC identified wrongdoing in the selling of the derivative products, the commission parted company with the FSS in terms of the gravity of the violation or the motivation for it.

The derivative fund crisis made headlines, as many of the investors were retirees, and some poured their life savings into the investments.

The authorities said the banks misled the investors by promising stable, high returns on the derivative products. Most of the products sold tracked 10-year German treasury bonds, although some followed the seven-year pound sterling constant maturity swap (CMS) rate and the five-year U.S. dollar CMS rate.

Investors lost their much of their principal as the Germany bonds surged and interest rates plummeted.

Bank employees told investors that their investments were secure as they would only suffer major losses if the Germany economy crumbled.

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