This article was published on Jan. 7, 2025, at 5:26 p.m. on the CHOSUNBIZ MoneyMove site.
The Financial Supervisory Service will finalize the level of sanctions against nine securities firms found to be rolling over customer wrap accounts and specific financial trusts in February. The sanctions are expected to be lower than those proposed by the Financial Supervisory Service, with only Kyobo Securities unable to avoid a mid-level trading suspension due to its more severe unsound business practices compared to other securities firms.
According to financial authorities on the 7th, the Financial Services Commission plans to hold a subcommittee meeting on the 20th of this month to discuss the disciplinary measures related to the unsound management of wrap accounts and trusts for nine domestic securities firms. This meeting will examine the amendments proposed by the Futures Commission on the sanctions originally proposed by the Financial Supervisory Service. The Financial Services Commission will then hold its regular meeting next month to finalize the sanctions determined by the subcommittee.
Wrap accounts and trusts are financial products where securities firms manage customer assets through one-on-one contracts. Unlike funds that invest multiple customer assets in the same underlying asset, wrap accounts and trusts are structured to manage assets individually based on each customer's investment objectives and capital needs. The duration is typically short, ranging from three to six months. This is the reason corporate clients often seek wrap accounts and trusts when managing short-term funds.
Previously, the Financial Supervisory Service launched a focused inspection on May 9, 2023, targeting nine securities firms (Kyobo, Mirae Asset, Yuanta, Eugene Investment, Hana, Korea Investment, KB) regarding the actual conditions of bond-type wrap accounts and trusts. The Financial Supervisory Service discovered that securities firms had rolled over losses from customer accounts to guarantee the returns of specific customers or covered some of the losses with company funds.
After about a year of inspection, the Financial Supervisory Service decided to impose a one-month trading suspension and institutional warning on NH Investment & Securities and SK Securities, respectively, while determining three to six months of trading suspension sanctions for the other seven firms. The institutional sanctions consist of five levels: institutional warning, institutional caution, corrective order, trading suspension, and cancellation of registration or approval. Among these, only institutional warnings are considered minor sanctions, while institutional warnings and above are classified as heavy sanctions.
However, the Futures Commission significantly reduced the trading suspension sanctions set by the Financial Supervisory Service to institutional warnings during the emergency meeting held on the 27th of last month. The Futures Commission was reported to have considered that the securities firms had already compensated investors for their losses and that a simultaneous halt of bond trading by major securities firms would inevitably impact the market. The Futures Commission also decided to reduce the approximately 35 billion won fines imposed on the nine securities firms to the 20 billion won range.
Nonetheless, while reducing the sanctions for the other eight securities firms to institutional warnings, the Futures Commission decided to maintain some trading suspension sanctions on Kyobo Securities. The period of trading suspension is planned to be shortened to one month. A high-ranking official in the financial authorities noted, "Unlike other securities firms, Kyobo Securities has been identified as having mobilized funds in rolling over its wrap accounts and trusts, and given the relatively widespread unsound business practices, heavier sanctions are inevitable."
Of course, there remains the possibility that the level of sanctions against Kyobo Securities could be adjusted during the subcommittee meeting on the 20th and the regular meeting of the Financial Services Commission next month. A Financial Services Commission official mentioned, "Discussions on the level of sanctions have continued over a long period, and the results of the Futures Commission's discussions are unlikely to change significantly in the subcommittee and regular meeting."