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(LEAD) Watchdog recommends highest level of compensation over derivative misselling fiasco

All Headlines 17:39 December 05, 2019

(ATTN: UPDATES with bank spokesperson's comments in 9th para)

SEOUL, Dec. 5 (Yonhap) -- South Korea's financial watchdog said Thursday that two local banks should provide compensation for up to 80 percent of their customers' losses from a recent misselling of derivatives linked to overseas interest rates.

The arbitration committee of the Financial Supervisory Service recommended the compensation rate of 40-80 percent to Woori Bank and KEB Hana Bank over six cases where derivative products were missold, depending on the severity of their failure to remind buyers of the derivative products' high risks.

The rate marks the highest compensation rate set by the watchdog's arbitration committee over a financial misselling incident, arbitration team head Kim Sang-dae said in a press briefing.

"For the first time, the arbitration took into account the social controversy caused by the bank headquarters' excessive pursuit of profit and serious lack of internal control," Kim said.

If the banks and the six investors accept the arbitration results, the case closes without going to court.

The highest compensation rate of 80 percent was imposed in the case of a deaf 79-year-old investor with dementia and zero investment experience.

The watchdog imposed 75-percent compensation on a bank that coaxed a housewife in her 60s into buying high-risk derivative, assuring "zero loss."

The lowest rate of 40 percent was imposed on a bank that did not sufficiently remind the customer of the investment's "ultra-high risks."

"We will fully cooperate with the arbitration panel's decision and swiftly carry out the compensation process to minimize our customers' losses," an Woori Bank spokesperson said, adding that the arbitration will settle the case without a court battle.

Repeated calls to KEB Hana Bank seeking comment went unanswered.

Since August, financial authorities have probed Woori Bank, KEB Hana Bank, brokerage firms and asset managers that sold the derivatives products.

The derivatives are structured to track the performance of constant maturity swaps, which allow the buyer to fix the duration of received flows on a swap of Treasury bonds of the United States or Britain or the yield of Germany's 10-year state bonds.

In the case of a certain derivative linked to 10-year German state bond yields, some investors lost 98 percent of their principal as bond yields in Germany unexpectedly sank.


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