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Leading local brokerages are expected to come under intense scrutiny over illicit practices of switching customer accounts or using corporate accounts to offset what would have been catastrophic losses for their high net-worth institutional and corporate customers, market watchers said Friday.

Amplifying the collective sentiment was the Financial Supervisory Service (FSS) sanctions on KB Securities and Hana Securities employees a day ealier for misappropriating company resources to falsify customers' wrap and trust fund products. A wrap refers to a short-term, high-return investment account where a single fee covers all associated costs charged to the account.

Wrap and trust generate profit from a maturity mismatch. Fund managers tie customers' short-term funds to long-term commercial papers. It was a common practice when interest rates were low. But the issue took center stage, as laid bare by the 2022 Legoland liquidity crisis, whereby brokerages were unable to process a spike in redemption requests due to difficulty in liquidating long-term bonds.

Thursday's measures included a three-month suspension of business, the second-strongest on a penalty scale of five. It was the first penalty for what the industry claims is a longstanding customary practice and therefore should not be subject to sanctions.

KB and Hana are among nine brokerages found to have maintained the questionable practice alongside Kyobo, Mirae Asset, Eugene, Korea Investment, Kiwoom, NH and SK.

According to the FSS, executives as well as low- and mid-level officials of KB and Hana involved were penalized. The final outcome will be made public after deliberations by the Securities and Futures Commission under the Financial Services Commission (FSC).

The commission members representing the private sector reportedly said employee sanctions are too excessive, since they did not seek personal gains.

FSS Governor Lee Bok-hyun emphasized in February that stringent accountability for illicit practices would be in order.

However, he said holding firm employees accountable would not be desirable unless presented with evidence of their involvement in the decision-making process.

The financial authorities have since fortified consumer protection measures.

In March, the FSC announced a revision to the Capital Markets Act to require financial investment firms to obtain consent from their customers before selling wrap and trust products.

Also required of the investment firms will be strengthened internal risk management standards.

They will have to ensure the investment period is concluded upon product maturity and come up with measures to limit investor losses in cases of changes in market conditions including interest rates.