FSS chief warns foreign financial firms against high-risk, short-term gains

South Korea’s financial market watchdog on Monday expressed concerns over financial firms’ tendency of seeking short-term gains, referring to the recent disputes on the mis-selling of high-risk derivatives.

“The conventional business practices, which led to the derivative-linked fund controversies, inflict heavy losses on both investors and financial firms,” said Yoon Suk-heun, governor of the Financial Supervisory Service.

The FSS chief was speaking during a luncheon at Conrad Seoul with top-level executives of 18 foreign financial firms operating in Korea.

“The kind of business practice that prioritizes short-term gains would undermine the investors’ trust and consequently hurt the long-term growth of financial companies,” he said.

“I request that (foreign financial service providers) adopt a sustainable management model for the sake of long-term profit.”

(FSS)

The governor’s remarks came as the FSS uncovered some 790 suspected cases of improper sales of high-risk derivatives that are linked to overseas interest rates.

The corresponding products, designed to track the output of constant maturity swaps, underwent heavy losses as bond yields in the US, Britain, and Germany dipped amid monetary easing moves around the globe. Some of the options that are linked to Germany’s 10-year government bonds may lead to losses of up to 95 percent, according to officials.

Some of the seller companies -- Woori Bank, KEB Hana Bank, and several brokerages -- allegedly failed to provide sufficient information to purchasers that warned them of the potential investment risks, according to the FSS.

The dispute settlement committee on the issue is to hold its next meeting later this week, likely to confirm the penalties for the violating companies.

Yoon also vowed further efforts to improve market regulations for foreign companies.

The total number of foreign financial companies operating here stood at 165 as of the end of June this year, more or less unchanged from 164 at the end of 2014.

By Bae Hyun-jung (tellme@heraldcorp.com)