Customers of equity-linked securities (ELS) products that track Hong Kong’s Hang Seng China Enterprises Index (HSCEI) call for measurses to cover their losses after they purchased the high-risk products from banks, during a press conference at the National Assembly in Yeouido, Seoul, Jan. 30. Yonhap
Critic says financial version of Serious Accidents Punishment Act may strap banks' sales campaigns
By Yi Whan-woo
A forthcoming law aimed at holding CEOs of financial firms criminally liable for lax internal controls is drawing mixed responses. Can it help root out unethical and deceptive sales of financial products? Or Will it be exploited by financial authorities to put pressure on firms?
The law has been revised from a current financial regulation, which was disputed for not sufficiently defining the responsibilities of CEOs and letting them off the hook even in the event of mis-selling and other inappropriate sales activities.
The revised act will come into force in June, after it was endorsed by the National Assembly and proclaimed in December.
It is welcomed by advocates as a highly effective measure to protect financial service customers from massive losses.
But at the same time, it has prompted concerns that it can be used to intimidate firms as witnessed in the manufacturing sector where CEOs can be sanctioned under the Serious Accidents Punishment Act.
Enacted in January 2022, the Serious Accidents Punishment Act imposes criminal liability on owners or executives who fail to ensure the safety of their business operations and prevent deadly and other serious accidents involving employees.
Despite its good intentions, the law has been disputed for putting businesses at risk of shutting down if their respective CEOs are put behind bars with no one else to deputize for them.
While the law initially targeted conglomerates and companies with more than 50 employees, it was expanded, Jan. 27, to include those that hire as few as five workers.
“We can certainly draw an analogy between the forthcoming law against CEOs of financial firms and the Serious Accidents Punishment Act,” a retired mid-level official from a private bank said on condition of anonymity. “It can enhance the CEOs’ commitment toward their respective firms, but also is feared to hold back companies from expanding their sales campaigns to minimize any possible risks.”
He noted how the five biggest banks in Korea – KB Kookmin, Shinhan, Hana, Woori and NH NongHyup – have recently come under fire for inflicting trillions of won in losses on customers who purchased equity-linked securities (ELS) products that track Hong Kong’s Hang Seng China Enterprises Index (HSCEI).
The lenders are criticized for “failing to adequately explain” risks associated with the fixed-income derivatives products that pay out a return based on the performance of HSCEI-listed Chinese stocks.
In the midst of an economic slump in China, investors are suffering heavy losses as the underlying stock index fell below minimum levels that guarantee a return on the principal investment.
The majority of the three-year maturity ELS products are set to mature in 2024, especially in the first half when around 10.2 trillion won of these products will reach maturity.
The banks accordingly have been suspending sales of the HSCEI-tied ELS products.
In that regard, Jung Ho-chul of Citizens’ Coalition for Economic Justice (CCEJ), a civic activist group, talked positively about what he called “the financial version of the Serious Accidents Punishment Act.”
“The finance sector needed 'electroshock therapy' for CEOs to properly manage operations, and that’s where the law will come in,” he said.
Jung pointed out that, prior to the Hong Kong index-tied ELS fiasco, more than 20 financial firms were involved in the mis-selling of fraudulent products from now-defunct hedge funds – Lime Asset Management and Optimus Asset Management.
He also pointed out that some CEOs from the companies involved, including banks and securities firms, were merely slapped with a verbal warning or suspended from duties but still managed to avoid harsher punishments as witnessed in similar cases abroad.
Asking not to be named, a public relations staffer from a commercial bank said that the government has been "pressing the lenders" and that the upcoming law "can be used as a means to tighten control over them.”
The staff member argued that the government has been "strictly overseeing the banks in the name of fair business practices."
KB Kookmin, Shinhan, Hana and Woori have been accused of allegedly colluding to set the loan-to-value (LTV) ratio for the sake of their profits while exploiting customers.
The ratio is used as one of the criteria to determine the amount of mortgage or secured housing loans, relying on the assessed value of a borrower's home, which serves as collateral.
The companies admitted that they opened and shared customer data and information. Nevertheless, they argue that it was merely used as a reference and that they did not collude to determine the LTV ratio on their path to set profitable mortgage interest rates.
Moreover, they underlined that offering excessive mortgage loans is banned under the ceiling of the LTV ratio imposed by the government.
“This case shows how the government can ‘improvise’ rules and regulations against the banks, especially when we are heavily criticized for ‘windfall profits’ in the era of high interest rates,” the staff member said.
