South Korea’s top financial regulator on Wednesday slapped a combined 36.5 billion won in ($30.8 million) fines on Woori Bank and Hana Bank, along with a six-month ban on attracting investors‘ money into privately pooled funds.

The Financial Services Commission’s final decision indicates that the authorities held the banks responsible for their lack of internal control, as they failed to protect retail investors from potential risks implied in the structured products known as derivatives-linked funds.

The degree of penalty, however, is lower than was advised by the watchdog Financial Supervisory Service in January.

Woori Bank will have to pay 19.7 billion won, which is 3.1 billion won lower than FSS’ recommendation, while Hana Bank’s penalty is 16.8 billion won, a reduction of 8.8 billion won.

The FSC also approved the financial watchdog’s “reprimand” warning on the banking group chiefs, Hana Financial Group Vice Chairman Ham Young-joo and Woori Chairman Sohn Tae-seung, issued separately from the penalties and compensation duty of the banks.

Both Ham and Sohn headed the respective banking units at the time of the revelation of the debacle.

Should these sanctions take effect, the two would face limitations on serving the next term or on pursuing new positions in the financial industry. While Ham has already started his second term as group vice chairman, Sohn has been seeking to extend his term at a shareholders meeting in March.

Woori‘s board of directors expressed in early February its intention to maintain Sohn as the only chairman candidate after the FSS hinted at penalties, saying there is no reason to change from the status quo without the FSC’s final decision. Sohn, as an individual, is likely to file a suit with a local court to nullify the FSC sanction. If the court embraces Sohn’s argument of authorities imposing “excessively heavy” penalties, he could keep the chairman post for a second term. He would otherwise lose the job.

Also, their bank branches will be suspended from offering fund products to their customers from Thursday until Sept. 4, as advised by FSS.

The banks’ branches were accused of attracting investors to derivatives-linked securities products tied to German sovereign bond yield and currency constant maturity swap rates in 2019, concealing the fact that investors were exposed to the risk of losing the entire principal depending on their performances.

This includes a 98.1 percent loss of one of the funds that trails the German 10-year government bond yield. The total of 8.3 billion won principal pooled from investors was reduced to 160 million won in four months. It was the product designed to promise investors a fixed income of the annual 2-4 percent return, but the contract also gives investors leveraged losses from it in the event of an unexpected downturn of the yield, which actually was true from August 2019.

The branches chose to draw investor money through privately pooled funds -- or funds attracting money from less than 50 investors -- instead of public funds, so that they could enjoy looser regulations in terms of the funds‘ target of investments. This led to the authorities’ about-face from a deregulative stance on privately pooled funds in February.

As of September 2019, investors into such structured products were estimated to have lost a total of 351.5 billion won, according to the FSS, which conducted a probe from August to November.

The FSC plans to notify the banks of the penalties and fines through FSS by no later than next week.

By Son Ji-hyoung (consnow@heraldcorp.com)