The Financial Supervisory Service (FSS) said on Oct. 1 that Woori and Hana Banks are suspected of having mis-sold about 20 percent of their controversial derivatives-linked fund (DLF) products.
The announcement was based on an inspection into the two banks’ DLF sales records. It found that of the 3,954 transactions, about 20 percent appeared to have been mis-sold. However, the number could be higher as it is based simply on an examination of sales documents.
The FSS launched an investigation of derivatives products sold by financial firms in August, and FSS Senior Deputy Governor Won Seung-yeon disclosed the interim results of the investigation at a briefing held at the FSS building in Yeouido.
Of the total amount sold, 672.30 billion won (US$557 million) worth of products has yet to mature as of Sept. 25. The balance decreased 122.70 billion won (US$101.66 million) as investors redeemed 93.20 billion won (US$77.22 million) worth of the products early and 29.50 billion won (US$24.44 million) worth of the products came due from Aug. 8 to Sept. 25. Out of the total, 578.40 billion won (US$479.20 million) worth of the products have entered the section of losses.
As of Aug. 7, the amount of DLF products which were sold by Woori Bank and Hana Bank and had yet to mature was 795 billion won (US$658.66 million). The two banks sold 210 DLF products, all linked to the interest rates in major countries such as Germany, the United Kingdom and the United States, to 3,243 investors. The remaining balance stood at 672.30 billion won (US$557 million) as of Sept. 25, but 578.40 billion won (US$479.20 million) worth of the options entered the loss section. It is estimated that around 351.30 billion won (US$291.05 million) or 52.3 percent of the remaining balance has been wiped out due to a sharp fall in yields on underlying assets, such as German treasuries.
The amount of early redemption and matured options totaled 93.20 billion won (US$77.22 million) and 29.50 billion won (US$24.44 million), respectively, until Sept. 25, while they made losses of 48.90 billion won (US$40.51 million) and 18 billion won (US$14.91 million).
Banks have increased the targets of fee profits and DLF sales every year in their management plans and the headquarters have encouraged sales department to achieve the targets on a daily basis. Financial companies saw their fees on the sale of DLF options linked to Germany’s government bonds account for 4.93 percent of the total profits. Foreign investment banks ranked first with 3.43 percent, followed by banks with 1 percent, securities companies with 0.39 percent and asset management firms with 0.11 percent. An FSS official said, “For fees, we let the market take its course.”
In late August, the FSS began its inspection of two banks, as well as three securities firms and five asset management companies which were involved in product design and sales of the DLS and DLF options.