SEOUL – Ms Park Soon-ja spent five decades working as a cleaner to build her life savings. Now, more than half of her 660 million won (S$649,000) has been lost after the South Korean retiree invested in a structured product so complex that a regulator said even the bankers who sold it struggled to understand how it works.

The 75-year-old is one of hundreds of thousands of South Koreans who were sold equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index (HSCEI) – a gauge of Chinese stocks listed in Hong Kong – by some of the nation’s most prominent lenders and brokerages.

The notes are at the centre of one of the nation’s biggest mis-selling scandals, with the authorities estimating losses for retail investors may reach 5.8 trillion won (S$5.7 billion) in 2024.

It is the latest in a series of shocks that have rattled the nation’s 94 trillion won market for structured products and has dented trust in the financial industry.

“The banker deceived me,” Ms Park, who did not finish elementary school and does not know how to use the internet, said of the investment she made three years ago with Kookmin Bank, the retail banking unit of South Korea’s largest financial firm KB Financial Group. “That money is my entire life.”

The widespread sale of the products exposes a retail investing landscape in South Korea, where middle-aged and elderly customers were enticed to buy the risky notes being aggressively marketed by banks.

The mom-and-pop investors were won over by the potential for high returns, viewed as necessary to alleviate an insufficient pension system, rising living costs, low interest rates and relatively weak returns on South Korean stocks.

“It’s hard to find a country where structured retail products with a risk of heavy losses are sold so widely to everyday consumers in such a large scale,” said Mr Lee Hyo-seob, a senior research fellow at Korea Capital Market Institute.

The five banks and six brokerages who were found to have mis-sold the products will pay an estimated 2.8 trillion won in combined compensation under the guidelines from South Korea’s Financial Supervisory Service (FSS), according to Mr Hyosung Kwon, an economist at Bloomberg Economics.

Exotic and popular

ELS products, first introduced in South Korea in 2003, initially gained in popularity as an alternative to mutual funds and term deposits.

The notes were easy to buy from retail banks, and their record of high returns made them especially popular among the retirees seeking steady streams of income.

The HSCEI-linked notes at the centre of the FSS inquiry were sold in 2021 against a backdrop of ultra-low interest rates.

Some South Korean banks, which rely heavily on interest-related income, moved to offset falling profitability by expanding margins from fees and commissions. They found a sweet spot, selling the structured products to retail investors hungry for higher returns.

The notes proved popular because the gauge’s volatility allowed them to generate higher coupon rates of around 4 per cent at a time when a term deposit offered about 1.2 per cent.

But there was a catch: if the index fell 50 per cent or more, investors stood to lose all their principal.

Fall it did. Hammered by persistent China-US tensions, worries about the outlook for Asia’s largest economy and Beijing’s regulatory crackdowns, the 50-member HSCEI capped an unprecedented fourth straight annual loss in 2023. While there has been a rebound in 2024, it is still down more than 48 per cent from its February 2021 peak.

For 51-year-old railroad worker Ju Jae-hyeon, the financial hit came in February when he received a text message from Kookmin Bank saying that the ELS product he had put 210 million won into three years ago had matured with a 53 per cent loss, meaning he had lost more than half of his initial investment.

Until then, Mr Ju had believed that his money was in fixed deposits.

“They emphasised only the product’s higher yields,” he said about the bank’s sale process. “I never got explanations about the indexes behind it or how they were managed.”

Kookmin Bank declined to comment about individual cases or about the customers’ allegations.

In addition to Kookmin, the FSS probe also looked at Shinhan Bank, Hana Bank, NongHyup Bank, Standard Chartered Bank Korea, Korea Investment & Securities, Mirae Asset Securities, Samsung Securities, KB Securities, NH Investment & Securities and Shinhan Securities.

‘No need to worry’

South Korea is well known for its legions of individual investors and their penchant for risky investments. Many people in their 20s and 30s have embraced cryptocurrencies and leveraged funds, and even placed large bets on Tesla.

Yet, 22 per cent of people facing ELS losses are aged 65 or older, and many say they should never have been sold the notes because they do not meet the criteria of being sophisticated investors.

In March, the FSS said its probe found that the notes were sold to investors unsuitable to buy such high-risk products, saying many bankers misrepresented the products.

It recommended that banks and brokerages compensate consumers based on their age and past investment experience. The watchdog is preparing to impose sanctions on the firms.

All five banks that were investigated by the FSS, as well as Citibank Korea that was not part of the probe, have accepted the guidelines, under which consumers are expected to be compensated between 20 per cent and 60 per cent of their losses.

NH Investment & Securities said it will consider the FSS recommendations, while the other brokerages declined to comment.

Many ELS buyers say they will reject anything but full compensation – an approach that will likely end up before the courts. Hundreds of customers have protested outside some of the banks, urging them to pay the losses in full.

Still, the FSS said only 6.7 per cent of the accounts were held by first-time investors in ELS. This may complicate customers’ efforts to seek full recovery, because the authorities have advised banks to return less money if they have invested in ELS before.

For people such as 78-year-old Moon Kui-ho, receiving full compensation is vital.

“All my lifetime’s savings are gone at once,” the former security guard and auto-factory worker said. “Young people can work to make money, but old people like myself have got nowhere to work. There is no hope.” BLOOMBERG