FSS weighs bank sanctions as 90% of 42-day ETF trusts carry front-loaded fees

The Financial Supervisory Service is examining whether major banks violated their disclosure obligations under the Financial Consumer Protection Act when selling exchange-traded fund trust products. The regulator is looking into whether banks disproportionately applied front-loaded fees, a structure that disadvantages customers. However, proving that banks intentionally steered customers toward the front-loaded fee structure during actual sales will not be easy. Determining how thoroughly banks must explain the advantages and disadvantages of fee structures to customers is equally difficult, deepening the FSS's dilemma over potential sanctions and compensation.

According to sources at financial authorities interviewed Thursday, the FSS completed its on-site inspection of ETF trust sales at major banks Friday and is now compiling the results.

In the inspection, the FSS focused on whether banks properly explained the front-loaded and back-loaded fee structures to customers when selling ETF trust products. It took particular issue with the fact that products carrying low target returns saw frequent short-term redemptions and reinvestments, yet banks predominantly applied the front-loaded fees that disadvantage customers. The inspection also covered whether banks, in some cases, recommended the front-loaded structure without adequately explaining the existence or advantages of the back-loaded option.

The FSS submitted data to the office of People Power Party lawmaker Seo Il-jun showing the average holding period for ETF trusts at six banks was limited to 42 days. The period covered January 2025 to May this year. By contrast, front-loaded fees accounted for 89.7 percent of all fee applications. Unlike the front-loaded structure, which deducts a fixed percentage of the investment amount all at once when a customer signs up, the back-loaded structure charges fees based on the actual holding period. This makes it relatively more favorable for short-term investors.

Over the same period, the six banks earned a combined 586.4 billion won ($438 million) in fees from ETF trusts. Based on completed transactions, the fees banks actually collected reached 394.8 billion won. That was 7.2 times more than the 54.5 billion won they would have received had banks applied the most favorable fee structure to customers.

Some in the banking sector disagree with the FSS's concerns. "High volatility in the stock market means share prices can also fall sharply, so it is difficult to agree that setting a low target return is itself a problem," an industry official said. "Front-loaded fees are generally the preferred method for customers, since once they are paid, there is no additional amount to pay."

With such differing views on fee structures and sales practices, several issues must be examined before determining whether banks violated their disclosure obligations under the Financial Consumer Protection Act. The key questions are whether banks intentionally steered customers toward front-loaded fees to boost fee income. Another is to what extent banks must explain the advantages and disadvantages of fee structures to satisfy their legal disclosure obligations. Sales and explanation practices vary by bank and by customer, and ETF trusts are not subject to a uniform recording requirement during sales. This makes it difficult to verify after the fact how thoroughly back-loaded fees were explained in individual transactions.

"Explanation practices differ from bank to bank, so a disclosure violation must be judged comprehensively," an FSS official said. "It is difficult to make a simple determination."

Article 19 of the current Financial Consumer Protection Act requires financial firms to explain important matters -- including fees borne by consumers -- when recommending investment products. The explanation must be clear enough for consumers to understand. Article 44 holds financial firms liable for damages if a violation of the disclosure obligation causes harm to consumers.

The FSS said it would separate the question of whether the fee structure itself is unreasonable from the question of whether laws were violated. "We will improve any unreasonable elements, and if there was a violation of the law, we will handle it accordingly," an FSS official said. "Nothing has been decided yet."

However, the FSS faces no shortage of dilemmas over how to proceed. If a disclosure violation is confirmed, it could lead to sanctions and compensation discussions, increasing the burden on banks. Conversely, if no illegality is confirmed, the outcome is likely to be limited to regulatory improvements. In that case, encouraging banks to voluntarily compensate customers would require a legal and managerial basis for a large-scale refund.

The FSS is also being cautious about the possibility of voluntary compensation. "The direction forward can only be determined once the inspection results are out, so this is not yet at the discussion stage," an FSS official said. "Since multiple banks are involved, we need to look at the inspection results comprehensively."