South Korea's financial watchdog has advised domestic banks to pay indemnities of up to 41 percent to local firms that suffered losses from currency-linked derivative products they purchased from the banks prior to the 2008 global financial crisis.

The Financial Supervisory Service(FSS) on Friday announced the arbitration proposal put forth by its dispute settlement panel recommending the banks pay 15 percent of losses to two companies and 20 percent and 41 percent, respectively, to two other businesses.

All four are known to have each suffered losses between three and 80 billion won.

The FSS concluded the banks failed to inform them about the risks involved in the so-called knock-in, knock-out(KIKO) products they sold to them in 2008 and prior.

The KIKO derivatives were designed to allow buyers to hedge against volatile currency swings by selling foreign currency at a fixed rate within a pre-set range, while facing the risk of huge losses if the currency deviates.

The FSS' proposed settlement is not mandatory. All the banks involved said they will internally review the settlement before making a decision.