South Korea’s Financial Supervisory Service (FSS) announced it will launch an investigation into 12 financial institutions for suspected violations in the selling of equity-linked securities (ELS) tied to Hong Kong’s Hang Seng China Enterprises Index (HSCEI). The investigation, starting on Monday, follows the FSS’s preliminary inspection conducted between November and December, which uncovered significant rule violations, including internal control lapses and mismanagement of contract-related documents.

The ELS in question are derivatives that yield returns based on the performance of equities, with investors facing principal losses if stock prices fall below a predetermined level. The FSS’s action comes in the wake of the HSCEI’s sharp decline since Feb. 2021, exacerbating the risks associated with these products. Among the first to be examined are KB Kookmin Bank and Korea Investment & Securities, the top-selling bank and securities firm of ELS products, respectively. The FSS plans to extend the investigation to other major banks and brokerages within the month.