On December 12, 2019, the Financial Dispute Mediation Committee (the "Mediation Committee") of the Financial Supervisory Service ("FSS") issued its recommendations on the request for mediation filed by four Korean export companies in July 2018 for the disputed mis-selling of Knock-In Knock-Out or KIKO currency option contracts by banks to the Korean export companies between 2007 to 2008.  The Mediation Committee recommended that the banks compensate the four companies in an amount ranging from 15% to 41% of the losses incurred by the respective companies from the KIKO contracts.  The recommended compensation amount was calculated based on specific facts pertaining to the respective transaction and the level of sophistication of each company.  

The controversy over the losses for the alleged mis-selling of KIKO contracts dates back to over ten years ago.  By way of background, between 2007 and 2008, numerous Korean small and medium sized export companies executed a total of 800 to 900 KIKO contracts with 14 Korean local banks to hedge currency risks in an environment where the Korean Won was appreciating.  Under these KIKO contracts, the export companies sold call options to sell US Dollars to the banks together with the purchase of put options to sell US Dollars to the banks at the agreed strike prices on the Korean Won to US Dollar exchange rate.  The structure was designed for the companies to profit from the KIKO contracts if the exchange rate stayed within the Knock-In and Knock-Out range whereas the companies could incur losses if the exchange rate were to rise above the Knock-In barrier.  At the onset of the financial crisis in 2008, as the Korean Won weakened, the export companies incurred large scale losses from the KIKO contracts as the call options sold to the banks became significantly in the money.  Many of the companies filed lawsuits against the banks claiming mis-selling by the banks as the companies alleged they were not adequately informed of the potential exposures from the KIKO contracts.  The dispute resulted in the Supreme Court of Korea rendering its decision in September 2013 that denied the companies' allegation of fraud and unfair practices by the banks.  In the ruling, the Supreme Court set forth the standards expected of banks in fulfilling its duty to adequately explain a financial product and the associated risks ("Duty to Explain") and in recommending suitable products to customers ("Suitability Standards"). 

In 2018, four of the companies which did not participate in the lawsuits that resulted in the 2013 Supreme Court decision filed application for mediation by the FSS to settle the dispute with the banks.  The main focus of the mediation proceeding was whether the banks failed to satisfy the Duty to Explain and/or the Suitability Standards as set forth in the Supreme Court decision.  The Mediation Committee found that the banks: 

• failed to fulfil their Duty to Explain because they did not accurately explain important information that would have affected the companies' decision to enter into the KIKO contracts, such as factors that may cause potentially large scale losses to the companies.  For instance, the Mediation Committee found that the banks did not adequately explain to the companies of the substantial losses it may incur when it over-hedges its foreign currency risks and the Korean Won to US Dollar exchange rate rises above the Knock-In barrier, whilst the banks emphasized the potential gains that the companies could realize if certain conditions were met; and 
• failed to meet the Suitability Standards because they recommended KIKO contracts to companies to hedge their foreign currency exposures without considering the companies' anticipated foreign currency exposures and the resulting foreign currency hedging required which should have incorporated existing hedges already put in place.  

The Mediation Committee's recommendation is not legally binding on the parties but they have 20 days to consider the recommendation from the date when the decision is served to the banks.  Failure to respond within the timeframe or rejection of the recommendation does not have any legal implications on the parties.  As there are some more export companies which incurred losses from the KIKO contracts but did not participate in the lawsuit resulting in the 2013 Supreme Court decision, the FSS stated that it will determine the recommended compensation amount for these companies based on the Mediation Committee's recommendations for the applications made by the four companies.