FSS Launches Voluntary Talks on KIKO Compensation... "Expecting Substantial Help for Affected Companies" (Comprehensive)

Meeting on the 12th to Form a Consultative Body with Bank Practitioners

[Asia Economy Reporter Kim Hyo-jin] The Financial Supervisory Service (FSS) will initiate a voluntary adjustment process this week with selling banks regarding compensation for companies affected by the foreign exchange derivative product KIKO.

According to financial authorities and the financial sector on the 10th, the FSS plans to hold a meeting on the 12th with officials from five banks?KB Kookmin, NH Nonghyup, IBK Industrial Bank, SC First Bank, HSBC?and the Korea Federation of Banks to discuss participation in a 'bank consultative body' that will address voluntary adjustments related to the KIKO incident.

These banks sold the product to some of the 145 companies affected by KIKO. An FSS official stated, "We will first explain the dispute resolution situation surrounding the KIKO incident."

In December last year, the FSS proposed a dispute resolution plan recognizing the responsibility for incomplete sales by six banks?Shinhan, Hana, Woori, DGB Daegu, Korea Citi, and KDB Industrial Bank?that sold KIKO to four companies, recommending compensation of 15-41% of the losses.

However, except for Woori Bank, the other five banks rejected the proposal, citing that "the 10-year statute of limitations for claims under civil law has already passed, and compensating now could constitute a breach of fiduciary duty harming shareholder interests," effectively causing the dispute resolution to collapse.

Separately, the FSS intends to devise a voluntary compensation or reimbursement plan for the affected companies. Shinhan, Hana, Woori, Korea Citi, and DGB Daegu Banks have already expressed their intention to participate once the bank consultative body is activated and will not attend this upcoming meeting.

Even if the bank consultative body is activated, the general view among banks is that the likelihood of promptly producing a concrete compensation or reimbursement plan is low. A bank official said, "If banks had accepted the dispute resolution plan previously proposed by the FSS, it could have served as a guideline to accelerate voluntary adjustment, but since the opposite occurred, the basis for voluntary adjustment has also weakened."

Another bank official commented, "Regardless of the amount, many banks have already concluded through a lengthy process that it is difficult to alleviate concerns about breach of fiduciary duty, and I am skeptical about how revolutionary logic can be created through the voluntary adjustment procedure." He added, "While I understand the intention to 'leave it to the banks' autonomy,' to solve the problem, the authorities need to proactively take a somewhat different approach, such as a political one."

KIKO is a derivative product structured so that if the exchange rate fluctuates within a certain range, foreign currency can be sold at an agreed rate, but if it goes beyond that range, significant losses occur. Export-oriented small and medium-sized enterprises subscribed to hedge exchange rate risks but suffered damages such as bankruptcies when exchange rates fluctuated sharply during the 2008 financial crisis.

In explanatory materials distributed on the day, the FSS expressed regret that "most banks did not accept the previous dispute resolution plan, although we hoped they would accept it proactively from a magnanimous perspective."

The FSS added, "To facilitate smooth voluntary compensation, we plan to support the consultative body by explaining the subcommittee's decision contents and compensation ratio calculation criteria," and stated, "We hope that results that are practically helpful to the affected companies will be produced."

This content was produced with the assistance of AI translation services.