FSS launches on-site inspections of Shinhan Securities, Kiwoom Securities over JTBC bond sales

The Financial Supervisory Service has launched on-site inspections of Shinhan Securities and Kiwoom Securities to determine whether the two brokerages engaged in mis-selling during the distribution of JTBC corporate bonds.

The FSS is focusing in particular on whether the brokerages proceeded with the bond issuance and sales despite being aware of JTBC's worsening financial condition, and whether they sufficiently disclosed the risks to investors and recommended the product in a manner suited to each investor's profile.

The FSS began the on-site inspections of both firms on July 2 after completing a preliminary review of the bond issuance and sales process, according to the financial investment industry. Retail investors had earlier filed complaints with the FSS, alleging that the brokerages failed to properly inform them of the investment risks.

Shinhan Securities served as the lead manager for the JTBC corporate bond issuance, while Kiwoom Securities sold asset-backed short-term bonds to retail investors. The bonds were distributed primarily through online channels, and Kiwoom Securities — which operates no physical branches — is believed to have handled the bulk of its sales online.

The FSS is examining whether the two brokerages issued the bonds with knowledge of JTBC's financial deterioration, and whether they gave investors adequate risk warnings and guidance appropriate to their investment profiles. The regulator said it has not yet decided whether to expand the inspections to other brokerages.

FSS Governor Lee Chan-jin addressed the matter at a press briefing on June 22, saying the regulator had "begun reviewing whether the issuance of commercial paper and corporate bonds was appropriate." He added that retail sales to individual investors appeared to have continued until just before the default, and that the FSS would "investigate the circumstances."