Kiwoom Securities has been hit by the double blow of a system outage and allegations of misselling financial products, putting it under a sweeping probe by the financial authorities.
In particular, the recent system error involved cases where investors deposited margin to prevent forced liquidation, but positions were liquidated due to a system defect, prompting criticism that the company's internal controls were effectively paralyzed. With the Financial Supervisory Service having reaffirmed a zero-tolerance policy on recent IT incidents in the financial sector, there are growing calls to scrutinize Kiwoom Securities' internal control systems across the board through this investigation.
The Financial Supervisory Service (FSS) on the 2nd launched on-site inspections of Kiwoom Securities and Shinhan Investment to check whether there was misselling of JoongAng Group corporate bonds. Shinhan Investment underwrote JTBC's corporate bond issuance, and Kiwoom Securities sold JTBC's asset-backed short-term bonds (ABSTB) to retail investors.
Affiliates' bonds of JoongAng Group were sold not only by Kiwoom Securities but also through other brokerages, including Korea Investment & Securities Co., NH Investment & Securities, and KB Securities. However, while other major brokerages sold to institutions, Kiwoom Securities is understood to have sold 15 billion won worth of JTBC asset-backed securities to individuals.
The JTBC asset-backed securities sold by Kiwoom Securities offered an annual rate of 7% to 8%, reportedly attracting significant retail funds. But when the ABSTB failed to repay principal and interest at maturity on the 12th of last month, investors began alleging misselling by Kiwoom Securities.
The Financial Supervisory Service (FSS) plans to examine how Kiwoom Securities classified short-term liquidity bonds—with more complex issuance structures than ordinary corporate bonds, commercial paper, or short-term notes—as products for retail sale. If indications of misselling by Kiwoom Securities are found, the firm will likely face not only regulatory sanctions but also liability for investor damages.
In the industry, repeated system outages are cited as a more structural problem than the misselling allegations. Kiwoom Securities has a highly layered trading system architecture, and outages occur with some frequency. Although investor losses continue, each case has merely been patched with post-incident compensation, drawing criticism that fundamental measures to stabilize the system are taking a back seat.
A highly unusual incident occurred recently. An investor who borrowed money from Kiwoom Securities to buy stocks paid margin properly to prevent forced liquidation, but the shares were forcibly disposed of due to a system error. Kiwoom Securities is discussing the scope of compensation for affected customers, but it is not disclosing the specific scale of the losses.
Notably, this system error happened just a week after Financial Supervisory Service (FSS) Governor Lee Chan-jin delivered a hard-line message about ongoing system outages at securities firms. At a press briefing on Jun. 22, Lee pointed to the failure of basic IT controls and the lack of proper infrastructure as reasons for the recurring outages at securities firms.
In April, Lee also said, "If IT incidents recur due to failure to fulfill basic obligations or inadequate internal controls, we will hold them strictly accountable under a zero-tolerance principle."
An industry official said, "Repeated system incidents ultimately come down to internal controls," adding, "There is a possibility that the authorities' review will not stop at identifying the immediate IT cause but extend to whether internal controls are improved."