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(EDITORIAL from Korea Times on Oct. 4)

All Headlines 07:15 October 04, 2019

Investment fund fiasco
: Sellers should be punished sternly for 'fraudulent' cases

Some banks and brokerage houses cannot avoid harsh punishment for their "fraudulent" sales of a high-risk financial product called a derivate-linked fund (DLF). They were found to have sold the product without drawing customers' attention to the potential risks of derivatives linked to overseas interest rates.

On Tuesday, the Financial Supervisory Service (FSS) announced the interim outcome of its 40-day investigation of suspicious and improper sales of the problematic products. The regulator said about 20 percent of 3,954 cases may have violated the law or internal regulations. It should conduct a further investigation to confirm the sellers' illegal activities related to this.

The FSS must then take stern action against the sellers ― Woori Bank and KEB Hanna Bank as well as three securities firms and five asset managers ― if they are found to have violated the law or the internal regulations. The sellers are also required to actively engage in dispute settlement with customers. If necessary, they must compensate the investors for their losses.

In general, investors are responsible for their investment in financial products ― whether they carry high risks or not. But in the case of the DLF in question, the sellers were suspected of engaging in deception in blind pursuit of handsome sales commissions ― 4.93 percent of the investment principle.

According to the FSS, most sellers of the DLF underestimated the risks while providing an overly optimistic prospect for returns. They usually portrayed a DLF as a safe investment vehicle with relatively high return and little to no risk of loss. They seemed too engrossed in making money by selling the product, while doing nothing to protect the investors.

The regulator said 3,021 individuals and 222 businesses bought 795 billion won ($662.9 million) worth of the derivative product as of Aug. 7. Among them were 1,462 people aged 60 or older who invested their retirement savings worth 346.4 billion won into the product. This means the elderly have become easy targets. Currently the DLFs have recorded a 52 percent loss. Some of the investors have already lost everything.

The more fundamental problem is that the derivative product was poorly designed. It was structured to track the performance of underlying assets such as interest rates and state bond yields in Britain, Germany and the U.S. The product has sustained a huge loss due to rate cuts and lower bond yields. Worse, the loss is likely to snowball if those countries continue to cut their rates.

The derivative fiasco reveals how dilapidated Korea's capital market is. A lack of advanced investment techniques, accountability and transparency caused the problem. Banks, brokerage houses and asset management firms have sought their own profit at the expense of customers and investors.

Financial regulators have also invited criticism for neglecting their obligations to ensure the sound operation of markets, promote fair competition and protect customers and investors. Now they should step up their supervision to prevent a recurrence of the DLF case.

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