Variable annuity mis-selling through a bank channel: selective refunds and a three-day regulator request
Between 3 February and 28 March the Busan branch of a foreign life insurer sold 87 variable universal life policies through a bank channel. Average annual premium was KRW 12 million, 61 buyers were aged 65 or older, and in 48 cases the file contains no recording of the explanation of the 100% equity fund allocation or of the possibility of principal loss. One customer's suitability assessment is recorded as 'conservative', yet the policy allocated 80% to an emerging-market fund. Bank sales staff earned a 3.2% commission against 1.1% for protection products, and the branch quality-assurance team reviews five cases a month. Nine complaints have arrived, two customers are threatening to go to the press, and the sales head proposes a 'quiet' goodwill refund to the two loudest complainants. The compliance officer must also answer an FSS information request within three business days.
1. Is a quiet goodwill refund to the two loudest customers acceptable? What remediation approach would the regulator expect?
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No. A selective, undocumented refund is the classic pattern supervisors treat as concealment and unfair discrimination among similarly situated customers.
- Scope the problem. Review all 87 files, and consider a lookback of at least 12 months for the same product and channel if the pattern repeats, against written mis-selling criteria: missing or incomplete recording of the principal-loss explanation, a suitability assessment inconsistent with the allocation (conservative profile with 80% emerging-market equity), elderly customers with concentrated equity exposure, sales completed in implausibly short sessions.
- One remedy standard for every customer who meets the criteria: cancellation or premium restoration plus compensation for documented loss, applied whether or not the customer complained. Document the standard and the decision-making body.
- Governance: a remediation committee with compliance, legal, actuarial and customer service; head office and board approval; a written plan with milestones and a complaints log.
- Contact customers proactively in plain language, with a dedicated hotline and no requirement that they 'prove' mis-selling beyond the file deficiency.
- Disclose proactively to the FSS. Partial, self-serving remediation discovered later aggravates the sanction rather than reducing it.
2. What must the compliance officer include in the three-day response to the FSS, and what must not be omitted or asserted?
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Give a complete but honestly bounded answer. The supervisor's real test is whether the branch knows the scope of its own problem.
Include:
- Counts, period, channel, age profile, average premium; file-defect numbers (48 without explanation records; the suitability mismatch); commission differential; QA sample size; complaint count and status.
- The review method: criteria, sample or full population, lookback, who owns it.
- Interim measures already taken: product or channel suspension, QA changes, re-recording requirements, retraining, suspension of staff where warranted.
- Root cause: incentive design, QA capacity of five cases a month against 87 sales, bank-staff training and supervision, elderly-customer safeguards.
- Timeline and governance, with head office involvement.
Do not: state conclusions before the file review is complete; minimise with percentages that hide absolute numbers; omit the two press-threat cases; or imply that a goodwill payment has resolved matters.
Preserve all recordings. Deleting call records would convert a conduct problem into an obstruction problem, which is materially worse for the branch and for the officer.
3. Design the control changes to prevent recurrence. Name specific controls, owners and review points.
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- Suitability and allocation: products above a risk threshold sold to customers aged 65+ or assessed as conservative require a second, independent confirmation and a supervisor-signed checklist; the system should hard-block the mismatch unless an exception is documented.
- Recording: mandatory recording with automated quality scoring on the principal-loss and fund-risk explanation, rather than a manual five-a-month sample; retain for the full statutory period.
- Incentives: remove or cap commission differentials that reward equity-heavy allocation; add conduct metrics (complaint rate, defect rate, cancellation rate) to branch and bank-staff scorecards.
- QA capacity: risk-based sampling of at least 10% of high-risk sales, and 100% review where a defect trend appears.
- Channel controls: contractual audit and training obligations for the bank, mystery shopping, and a right to suspend the channel.
- Governance: a monthly conduct dashboard to the compliance committee, complaint-trend triggers that escalate automatically, and a product-approval gate that tests elderly-customer suitability before launch.
Assign each control an owner and a due date, and formally test the design after six months. A control set without testing evidence is only an intention.