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Discipline of banks is starting point for eliminating misleading selling
The Financial Supervisory Service has ordered two local banks to pay the highest compensation ever for misleading selling of derivatives-linked fund (DLF) products to investors, causing severe financial losses. The regulator's financial dispute arbitration committee Thursday told Woori Bank and KEB Hana Bank to compensate 40 percent to 80 percent of their customers' losses.
In deciding the compensation rate, the panel took into account the banks' failures to notify investors of high risks and to maintain tight internal controls, as well as those of customers to invest at their own risk. The punitive compensation order seems to reflect the watchdog's determination to hold the banks accountable for betraying their clients' trust and help investors recoup as much of their losses as possible.
The stern action should serve as a warning to prevent the moral laxity of financial service firms and root out the misleading sale of risk-prone products. In one extreme case, a bank sold the risk-prone product to an investor, 79, with dementia and hearing problems, causing him to lose almost all his principal, and in another case a bank coaxed a 60-something housewife with no investment experience into buying the products, assuming "zero loss."
Aside from the compensation decision, the FSS must make the two banks take legal responsibility for their unethical business practices. To prevent a recurrence of similar practices, the regulator's disciplinary action should not end up as just another slap on the wrist. The regulator should also share part of the responsibility for loose supervision. FSS officials should ask themselves whether they are capable of coping with the increasingly complicated financial products and techniques and if the FSS has been negligent in protecting financial consumers.
On Nov. 14, the regulator released countermeasures to prevent similar incidents, prohibiting banks from selling products with a risk of losing 20 percent of the principal or more. It should go further. Financial firms that neglect to protect consumers should have no place in the domestic market. Investors themselves are not entirely free from blame, with many jumping into the fray without a second thought, and then passing the buck on to financial firms or authorities if things go awry. This shows why the FSS policy package should also include provisions to strengthen investors' responsibility.
