KEB Hana, Woori chiefs likely to face heavy penalties over derivatives misselling

With financial authorities set to finish their monthslong investigation of the sale of high-risk derivatives-linked securities and related funds, key sellers are likely to be handed down heavy penalties for failing to properly warn investors of the risks.

At the heart of the commotion was KEB Hana Bank, which has recently been found to have discreetly deleted related internal documents, attempting to stifle evidence.

The market watchdog Financial Supervisory Service is scheduled to wrap up its investigation into the case in the upcoming week, officials said Sunday.

Since late August, two local banks, three brokerages and two asset managers have been under investigation for their operation of derivatives-linked funds and issuance of derivatives-linked securities.

The term derivatives-linked securities refers to financial products structured to trail the performance of underlying assets, such as stocks or equity indexes. Their returns are determined by the movements of the underlying assets and bring higher returns than interest income, but at the risk of losing the principal.

Financial authorities suspect that the sellers failed to sufficiently inform the customers of the risks linked to the purchase of these high-yield products.

The sales of the controversial derivatives products, mainly sold in the form of funds, has led investors to lose a combined 351.5 billion won as of end-September, FSS data showed.

Amid the disputes and uncertainties, the sales of derivatives-linked securities here last month dropped nearly 32 percent on-month to 1.4 trillion won ($1.2 billion), according to the Korea Securities Depository.

The consequences will be the heaviest upon KEB Hana Bank and Woori Bank. Both major lenders are expected to face disciplinary actions both upon the organization and upon the chief official in charge.

The potential list includes Woori Financial Group Chairman and Woori Bank CEO Sohn Tae-seung, Hana Financial Group Vice Chairman Ham Young-joo, and KEB Hana Bank CEO Ji Sung-kyoo. Ham served as KEB Hana Bank CEO until March this year.

While claiming that the detailed measures for these executive members are yet to be decided, the FSS has alluded that heavy penalties – reprimand, warning, suspension or dismissal -- could be possible, considering the extensive investor losses.

KEB Hana Bank is expected to face additional sanctions for destruction of evidence.

During the parliamentary audit last week, FSS Gov. Yoon Suk-heon and Deputy Gov. Kim Dong-sung stated that KEB Hana Bank had intentionally deleted some internal documents with sales records related to derivatives-linked funds.

Bank CEO Ji admitted that he had given down orders to draft new documents on the sales. Should he be held accountable for the deletion of the data, he is certain to face a top-level penalty.

“According to our guidelines, obstruction of investigation would notch up the level of penalty,” an official of the FSS said.

Also, considering past financial fraud disputes, the FSS chief added that the compensation amount to be paid by the sellers could be as much as 70 percent of the losses or even higher.

“I agree that we do not necessary have to conform to precedents (in which the compensation ceiling was set at 70 percent of the total losses) and will make flexible responses,” Yoon said.

By Bae Hyun-jung (tellme@heraldcorp.com)