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April 22, 2024

Regulator unveils plans to compensate losses from derivatives linked to Chinese stocks

PUBLISHED : March 11, 2024 - 11:05

UPDATED : March 11, 2024 - 11:12

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Members of civic activist groups are staging a protest in Seoul, calling for a government audit into alleged incomplete sales of ELS tracking to Hong Kong`s H Index. (Yonhap)

The financial regulator on Monday unveiled a set of plans that advise banks and brokerages to compensate losses from derivative products tracking Chinese stocks listed on the Hong Kong exchange.

The Financial Supervisory Service (FSS) said its preliminary inspection, conducted for two months since Jan. 8, has verified "various cases of incomplete sales" involving equity-linked securities (ELS) products tracking Hong Kong's H Index.

The outstanding value of such products stood at 18.8 trillion won ($14.2 billion) as of end-December, with 15.1 trillion won, or 80.5 percent of the total, set to be redeemed this year.

The products, if redeemed at end-February value, would post a combined loss of up to 5.8 trillion won, according to the FSS.

"The sellers had created an environment for incomplete sales by setting excessive sales targets during a period of growing risks of loss for consumers and promoting all-out sales efforts through inadequate performance indicators, while neglecting the sales cap designed to protect consumers," it said in a press release.

"As a result of its inspection, (the government) has confirmed various cases of illegal and unfair practices, including incomplete sales," it added.

Incomplete sales occur when financial institutions fail to provide all necessary information to consumers about products, including contract terms and associated risks. The financial regulator earlier said its inspection involved 12 local banks and brokerages.

The proposed compensation package requires the sellers of ELS products to pay a minimum of 20 percent of the loss incurred by consumers when they are found to have violated any regulation, while the compensation rate may go up to 100 percent, depending on the seriousness and number of violations and unfair practices committed by the financial institutions.

"The FSS plans to quickly start the dispute mediation process by holding dispute mediation committee meetings on representative cases," it said, noting the first of such meetings may be held next month.

"Still, each financial institution may start voluntarily compensating consumers based on the proposed compensation rate." (Yonhap)

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