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| Members from Korean Finance & Service Workers' Union stage a protest in front of Cheong Wa Dae in Seoul on July 29, urging the presidential office to settle a series of disputes over financial scandals surrounding mis-selling of some risky private equity funds. Yonhap |
By Lee Min-hyung
Domestic commercial banks here are suspending sales of risky financial products ― mostly private equity funds (PEFs) ― amid unceasing scandals surrounding lenders' involvement in the mis-selling of such high-risk, high-return investment funds, officials said Wednesday.
Major banks have for years raked in hundreds of billions of won in commissions from sales of PEFs to individual investors. With financial authorities starting to ease regulations in 2015, lenders have been able to sell PEFs to customers at most sales offices. For them, sales of the products were seen as an optimal source of non-interest revenue amid the prolonged economic slowdown.
But banks are on track to discontinue sales of the profitable income source after a number of banks found themselves mired in controversy over the so-called "incomplete sales" of such funds. The term is used when financial institutions fail to properly deliver information on sales products ― such as their potential risks ― to customers.
Woori Bank and Hana Bank were particularly hit hardest by the mis-selling of derivative-linked fund (DLF) options last year. In March, the Financial Services Commission (FSC) slapped heavy sanctions against the two lenders for the incomplete sales of the products, banning them from selling PEFs for six months. They were also fined tens of billions of won as the mis-selling affected hundreds of customers.
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| Victims of a redemption fiasco caused by Lime Asset Management stage a rally in front of Shinhan Bank headquarters in Seoul on July 10. Yonhap |
Other lenders and major financial institutions ― such as brokerage firms ― have since suffered from similar fiascos over other risky funds. Shinhan Bank is also one of the major retailers of a frozen hedge fund managed by Lime Asset Management.
"Most commercial banks are no longer promoting such risky fund products to customers in the aftermath of the big financial scandals," an official from a local bank said. "Customers are reluctant to subscribe to such products despite their high returns. Amid such a social atmosphere, it is natural for us to suspend PEF sales. The mood will continue for the time being until the scandal aftermath dies down."
Some banks that have not seen many sales of such troubled funds are also taking steps to discontinue sales of risky PEFs amid fears of being dragged into the controversies.
KB Kookmin Bank is the only top-tier lender here that did not make headlines due to the fund-related scandals.
"The market for risky PEFs has shrank enormously after a series of financial scandals erupted regarding the mis-selling of the products, and few lenders dare to sell such products amid the negative social mood for risky funds," an official from the lender said.
But KB is also selling PEFs, excluding ones with high returns, as not all PEFs come with inherent risks, according to the official.
"We are selling only some safe PEFs from which the returns may not be as high as the conventional risk-laden ones," he said.
Shinhan Bank, one of Korea's leading banks along with KB, is taking a similar approach.
"Even if Shinhan has not fully suspended selling PEFs, we are focusing on sales of a few mid-risk, mid-return funds," a spokesman at the lender said.
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| Financial Services Commission (FSC) Chairman Eun Sung-soo speaks during a finance conference with CEOs of the nation's major financial groups at the Seoul Government Complex on Feb. 24. Yonhap |
It is likely that banks will continue to refrain from selling risky PEFs with the FSC tightening monitoring in an attempt to prevent any similar fiascos. The regulator recently urged banks and securities firms to mandatorily check activities on the management of PEFs on a quarterly basis.
Critics argue banks will suffer from an earnings decline following the suspension of PEF sales this year. Amid the prolonged low interest rate and low growth, it appears it will be tough for them to find new revenue sources that can replace risky product sales.
According to the FSC, the nation's five major banks have sold PEFs worth 70.67 trillion won for five years since 2015. Hana Bank reaped the most in sales commissions during the same period, generating 96.6 billion won. Woori Bank, Shinhan Bank and NongHyup Bank followed on the list. KB came in fifth with 38.4 billion won.
