Tension is rising in South Korea's financial investment industry ahead of a parliamentary audit. Investor protection and information security verification are expected to be key issues. With the scale of retail losses from single-stock leveraged products now disclosed and hacking incidents spreading across the financial sector, securities firms' security and internal control systems have emerged as major targets for scrutiny.

The National Assembly's Political Affairs Committee will hold an audit of the Financial Services Commission on Oct. 8, the financial investment industry said on Tuesday.

Key issues cited include the process of introducing single-stock leveraged exchange-traded funds (ETFs) and exchange-traded notes (ETNs), follow-up management and responses to financial-sector data leaks.

The heads of securities and asset management firms who had been mentioned as witnesses in connection with the introduction of leveraged products were left off the witness list for the Oct. 8 audit.

Park Hyeon-ju (박현주), chairman of Mirae Asset Financial Group, Kim Nam-koo (김남구), chairman of Korea Investment Holdings, Kim Seong-hwan (김성환), chief executive of Korea Investment & Securities, and Bae Jae-kyu (배재규), head of Korea Investment Trust Management, were not ultimately adopted despite being requested by the opposition as witnesses.

Questions in the audit of the FSC are expected to focus on the circumstances behind the product launch, supervisory responsibility and the effectiveness of post-launch investor protection measures. The possibility of additional witness adoption remains ahead of an audit of the Financial Supervisory Service on Oct. 19 and a comprehensive audit on Oct. 22.

Controversy over leveraged products is intensifying again as the scale of actual losses by retail investors has been disclosed.

According to Financial Supervisory Service data disclosed on Oct. 6 by the office of Choi Eun-seok (최은석), a lawmaker of the People Power Party, retail investors' confirmed losses totalled 232.42 billion won from May 27 to Aug. 14 as they traded single-stock leveraged and inverse exchange-traded products (ETPs) through 10 comprehensive investment firms.

At a Finance and Economy Ministry audit held the same day, questions continued over whether risks were sufficiently reviewed at the time of the product introduction and whether investor protection devices were appropriate.

Deputy Prime Minister Lee Hyung-il said the introduction of individual financial products is led by the FSC, while expressing regret over investor losses. Kwon Dae-young (권대영), first vice minister of finance and economy who was FSC vice chairman at the time of the launch, also expressed regret over investor losses.

Financial authorities temporarily halted new listings on July 16 and banned advertising, then raised the basic deposit requirement from 10 million won to 30 million won in cash from July 31.

They excluded substitute securities such as stocks, ETFs and bonds and proceeds-secured margin loans from the calculation of the basic deposit requirement. They also said proceeds from securities sales would be 인정ed only after settlement is completed and cash is actually received.

Trading has dropped sharply since the rules were introduced. According to the Korea Exchange, the average daily trading value of 16 single-stock leveraged and inverse ETFs fell about 92 percent to 990 billion won from 1.225 trillion won when comparing one month before and one month after the deposit rule took effect.

The parliamentary audit is expected to focus less on the decline in trading itself and more on whether loss-risk guidance, investor education and product sales and market management by asset managers and securities firms were sufficient.

The hacking incidents in the financial sector have also emerged as an urgent issue for the securities industry. Financial authorities began on-site inspections after receiving a report on a Shinhan Bank intrusion incident on Sept. 30, then expanded the scope of checks to the entire financial sector as intrusion incidents were identified at KB Kookmin Bank, Hana Bank, BNK Busan Bank and savings banks and capital companies.

They asked securities firms and others to conduct emergency checks by Oct. 8 on attack blocking, whether damage occurred and the security status of systems exposed to the outside. Major securities firms are also blocking IP addresses used in the attacks and checking external access sections, authentication systems and the status of personal data holdings.

The FSS on Tuesday additionally ordered the securities industry to conduct a full recheck of its information technology security systems.

At a meeting held that day with audit heads from 21 major securities firms, Seo Jae-wan (서재완), deputy assistant governor for the financial investment sector, said, "Please fully recheck your IT security and inspection systems with an extraordinary sense of vigilance," and "Quickly and accurately identify the possibility of investor damage and immediately implement protective measures if necessary."

Along with security issues, internal control systems have also been put on the list of items to be checked.

The FSS said chronic illegal practices are being repeated, including false or inadequate entries in product prospectuses and sales activities using personal mobile phones. It called for strengthening an inspection system focused on prevention rather than post-detection. It also ordered firms to review whether recent investor protection measures have been implemented, including self-management of credit financing and steps to improve false and exaggerated advertising.

FSC Chairman Lee Eok-won (이억원) said at an emergency inspection meeting across the financial sector on Oct. 4, "The possibility is also growing that a security vulnerability at one financial company could lead to risks across the financial sector," and ordered a reset-level recheck of the overall information security system.