South Korea’s financial watchdog advised Woori Bank and KEB Hana Bank to cover up to 80 percent of consumer losses from their products of derivative-linked funds (DLFs) tied to 10-year German Treasury bond, the highest-ever financial consumer damage rate in Korea.

The dispute settlement committee of the Financial Supervisory Service (FSS) ruled on Thursday that the banks should remunerate 40 percent to 80 percent of the losses from the DLFs after concluding that they had mis-sold the risky funds to mostly elderly and novice investors without giving full explanation on their potential risks. The authority accused the banks of causing a social turmoil with excessive marketing and lack of internal oversight.

Out of the six cases filed with the committee, one case involved a bank employee who arbitrarily labeled an investor as a high risk-taker, and the others violated the duty of explanation on risks that could come with the highly risky fund products.

The authority ordered the highest 80 percent compensation for a 79-year-old dementia patient who has a hearing impairment and no experience in investments. The second highest 75 percent loss coverage rate was ruled for a woman in her 60s new to the exotic investment who was easily misled by the bank’s false promise on zero percent loss probability.

The committee set a 65 percent compensation rate for a case where the bank misinformed on Constant Maturity Swap (CMS), 55 percent on a sale without additional explanation on CMS although the bank knew that the investor’s misunderstanding, 40 percent on a case where the bank only stressed safety of the investment without elaborating on risk factors and 40 percent on a sale made without checking the investor’s risk-taking tendency.

The FSS will require the banks to set their own compensation rate based on its recommendations. But they must cover minimum 20 percent of the losses even if the investors were found partly responsible. The banks will soon set up their own compensation guidelines and notify them to the victims.

By Choi Seung-jin, Chung Joo-won and Choi Mira

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