In a revelation that could reshape South Korea’s financial landscape, the country’s financial watchdog, the Financial Supervisory Service, has exposed a troubling scenario. Major brokers, including Kookmin Bank, Shinhan Bank, and Korea Investment & Securities Co., are alleged to have misrepresented risky China-linked structured products to retail investors. The investigation has brought to light poor regulatory compliance and systematic failures in the sale of complex financial products linked to the Hang Seng China Enterprises Index (HSCEI).
 The FSS’s investigation indicates that losses from these high-risk notes may total a staggering $4.4 billion this year, with the losses estimated based on the current levels of the HSCEI. South Korea, one of the world’s largest markets for structured products, has seen a surge in the availability of these notes at retail channels, particularly local banks. Middle-aged and elderly Koreans, seeking additional income amid an inadequate pension system and rising living costs, have been drawn to these products.
 Regulators are now contemplating remedies, including penalties and a ban on sales, after reviewing how financial firms compensate and reconcile with retail investors. The FSS has highlighted systematic breakdowns that prioritized firms’ profit-making at the expense of consumers’ interests, signaling a need for corrective measures.
 Despite consumer protection tools shored up in 2021 after previous financial scandals, the FSS notes that these tools did not operate effectively in this case. The investigation discovered instances where banks relaxed internal risk management rules and brokerages recommended high-risk products to investors seeking principal protection.
 Retail investors, known for embracing risky bets, are likely to face compensation that is less favorable than in previous instances. With a significant portion of the outstanding balance in HSCEI-linked notes held by individuals aged 65 or older, the impact on investors is substantial. Banks are expected to draw up compensation plans, and their first-quarter financial results may reflect these losses.
 The FSS has outlined guidelines on compensating investors for their losses, and it plans to oversee a conflict resolution process starting April. The market reactions to the probe results have been largely muted, with expectations that the compensation may be lower than in previous cases. Nevertheless, if compensation exceeds 1 trillion won, some analysts foresee a short-term shock to the stocks of banks involved.
The investigation serves as a critical moment for the financial sector in South Korea, prompting calls for self-reflection and a reassessment of market practices.