South Korea watchdog intensifies crackdown on China-linked notes

South Korea’s regulator will launch a wider probe into local banks and brokers that sold exotic notes linked to Chinese stocks amid concerns that the securities may saddle investors with heavy losses.

Authorities will start investigating 12 institutions on Monday to determine if there was any wrongdoing over the sale of equity-linked securities that are tied to the Hang Seng China Enterprises Index, according to a statement from the Financial Supervisory Service. KB Kookmin Bank and Korea Investment & Securities are among the firms that will be probed, it added.

The watchdog said it uncovered several issues during a two-month inspection, including the practice of pushing bankers to aggressively market high-risk notes that are hard for retail investors to understand.

Even if the banks had systems in place, “we are not sure whether they did their duty to explain the product in a way that’s easy to understand, or whether customers just clicked and signed the contracts to buy something without knowing exactly what it is”, FSS Governor Lee Bokhyun told a press briefing on Thursday.

Sanctioned stocks, shunned by US investors, are top performers for Chinese funds

The probe shines the spotlight on investing trends in South Korea, where an insufficient pension system and a general penchant for risky trades have prompted retail investors to pile into highly speculative bets. Authorities are now seeking to address the situation, with regulators creating a team to manage potential investor complaints related to possible losses from the equity-linked notes.

About 15.4 trillion won (US$11.7 billion) worth of the equity-linked securities will mature this year as investors couldn’t meet the requirements for early redemption, the FSS said in the statement. Some of the notes were sold in 2021 when the HSCEI was above 12,000, whereas the gauge is now trading at less than half that level.

The total outstanding balance of the notes is 19.3 trillion won with retail investors holding 91 per cent of them, FSS said. About 30 per cent of the investors are aged 65 and above.