Banks Fined Tens of Millions of Won for Failing to Record Sales of High-Risk Products to Elderly Customers

Financial Supervisory Service Sanctions Banks for Failing to Fulfill Obligations in High-Risk Product Sales
Tens of Millions of Won in Fines for KB Kookmin, Hana, Shinhan, and Others

The Financial Supervisory Service has imposed tens of millions of won in fines on major banks for failing to comply with the mandatory recording requirement when selling high-risk products, such as derivative-linked securities, to customers aged 70 and above.

On December 26, the Financial Supervisory Service announced that KB Kookmin Bank, Shinhan Bank, and Hana Bank had been sanctioned with fines and other penalties for failing to fulfill the explanation confirmation and recording obligations when selling equity-linked trust (ELT) products in 2021, which were based on the Hang Seng China Enterprises Index (HSCEI) as the underlying asset.

The Hong Kong H Index ELT is a specific money trust product that invests in equity-linked securities (ELS) issued by securities firms, with the Hong Kong H Index as the underlying asset. As long as the underlying Hong Kong H Index does not fall below a certain level, the product guarantees the promised interest and principal. However, after the product was sold, the underlying Hong Kong H Index dropped significantly, resulting in substantial losses for investors.

The Financial Supervisory Service imposed a fine of 36 million won on KB Kookmin Bank on December 24, citing the bank's failure to properly disclose risks when selling high-risk products. The Financial Supervisory Service pointed out that, on February 8, 2021, Branch A of KB Kookmin Bank sold the Hong Kong H Index ELT product to investors without obtaining confirmation-by means such as signature or personal seal-that the investors understood the explanation. In addition, several branches, including Branch B, were found to have failed to properly record the contract process when selling the product to general investors aged 70 and above during a similar period.

According to the Enforcement Decree of the Financial Investment Services and Capital Markets Act, trustees are required to record the contract process when entering into a trust contract with a general investor aged 70 or older in which trust assets are managed through derivative-linked securities, or when entering into a high-risk money trust contract with an individual general investor. However, these requirements were violated.

On the same day, Hana Bank was fined 24 million won and Shinhan Bank was fined 10 million won by the Financial Supervisory Service. Both Hana Bank and Shinhan Bank were sanctioned for violating the recording obligation when selling ELT products that included the Hong Kong H Index.

Woori Bank was sanctioned by the Financial Supervisory Service on December 23 for incomplete sales of private equity funds. It was found that Department C of Woori Bank violated the duty to explain the uncertainties of certain private equity funds to investors during the launch of some funds in 2019.

At 16 branches of Woori Bank, between June 2017 and August 2019, the bank violated legal obligations under the Capital Markets Act, such as the suitability principle and the duty to confirm explanations, when selling funds and trust products to 22 general investors. At some branches, it was discovered that the seller arbitrarily registered investor profile information in the system without actually assessing the investors' risk preferences.