Financial Supervisory Service Finds Inadequate Consumer Protection in CFDs... Large Sales by Related Parties Before Sharp Decline Also Detected

Unfair Commission Payments Also Confirmed
Reference Materials Provided to Prosecutors for Investigation

Regarding the 'SG Securities-triggered Stock Price Crash Incident,' it has been revealed that major Contract for Difference (CFD) dealers, including Kiwoom Securities, exhibited inadequate practices in protecting financial consumers. Additionally, it was confirmed that unfair commission-linked payments were made, and executives and related parties of securities firms sold large volumes of specific stocks intensively just before the sharp price drop.

On the 30th, the Financial Supervisory Service (FSS) announced that these findings were confirmed following a focused inspection on the appropriateness of business operations at three major CFD dealers, including Kiwoom Securities.

Among the unreasonable business practices, exaggerated advertising of CFD leverage was first identified. The FSS found cases where uncertain matters were presented as certain in investment product advertisements, or where matters significantly affecting financial consumers' rights and obligations were misrepresented. Specifically, although stock substitution leverage is applied in CFDs of other companies as well, it was portrayed as a unique advantage of the company, and the key explanation document stated 'up to 2.5 times leverage,' while the advertisement implied that leverage could exceed 2.5 times, misrepresenting the actual product characteristics.

Failure to verify the actual identity was also detected. When opening a CFD account non-face-to-face, the Real Name Financial Transactions Act requires verification of the trader's real identity through at least two methods, such as submitting a copy of an ID and video calls.

It was also confirmed that when selling high-risk financial investment products, summary explanatory documents were not provided, and guidance on loss risk scenario analysis was insufficient. Furthermore, there were shortcomings in setting the appropriate customer scope for sales.

Deficiencies were found in the risk management system, including CFD liquidity standard management. It is desirable to establish and operate a CFD risk management system that manages tradable CFD stocks based on liquidity standards. However, cases requiring improvement were identified, such as the need to periodically revise trading volume standards for tradable CFD stocks to prepare for potential losses due to insufficient trading volume and sudden price fluctuations.

In addition, unhealthy business practices related to CFD trading were uncovered. Company A was found to have paid fees linked to commission income or provided marketing support funds to the trading system development company involved in CFD trading.

Instead of directly bearing the costs of building the CFD system, Company A paid a certain percentage of the commission revenue collected from customers monthly to the system development company through a foreign securities firm. The accumulated amount was approximately 14 billion KRW. The FSS confirmed that, at the request of Company A's CFD executive, the foreign securities firm paid CFD marketing funds to the system development company, not to Company A.

During the inspection of whether internal controls related to the use of undisclosed material information in stock trading or blocking information exchange were appropriate, it was confirmed that a related party of an executive at Company B sold a large volume of a specific stock worth about 15 billion KRW just before the stock price crash. Additionally, some departments of Company B were found to have inadequately recorded meeting and communication records by omitting them.

The FSS judged that further investigation is necessary regarding the unfair commission-linked payments and the concentrated large-scale sales of specific stocks just before the price crash, and provided the prosecution with reference materials for investigation.

An FSS official stated, "We will take strict action against the illegal and unfair practices confirmed through the inspection," and explained, "Various follow-up measures, including amendments to the Financial Investment Business Regulations under the 'CFD Regulatory Supplement Plan,' are scheduled to be implemented from September 1." The official added, "Through strengthened management and supervision systems for securities firms and investor protection measures, we will strive to restore trust in the capital market and establish a sound investment culture."

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