Banks Busy Over ELS Loss Risks... "Need to Strengthen Measures Against Mis-selling"

H Index Halved with Losses Expected to Materialize Next Year
Field Support Team and Dedicated TF Launched
Customer Complaint Counseling and Information Provided

Banking Sector "Low Risk of Mis-selling," but Experts Say "Formal Procedure Compliance Is Insufficient"
Possibility of Discussing Appropriateness of High-Risk Product Sales in Banks

As losses on Hong Kong H-Share Index (HSCEI)-linked ELS (Equity-Linked Securities) products are expected to materialize in the first half of next year, major commercial banks that sold these products are busy preparing countermeasures. While most have focused on responding to consumer complaints, experts point out that preemptive measures are necessary as issues of mis-selling may arise.

Banks Launch Task Forces in Preparation for Increasing Customer Complaints

According to the financial sector on the 22nd, NongHyup Bank is preparing to establish an on-site support team within its trust department to prepare for potential losses on ELS products. The plan is to assign staff at branches to handle consumer consultations and post-loss responses. Considering the nature of the products, support is being sought from employees with experience in wealth management (WM). The team is reportedly about 30 members in size. Prior to this, the bank formed a task force (TF) to provide market information and conduct training for branches.

Kookmin Bank, known to have the largest issuance volume of H-Share Index-linked ELS products among banks, also formed a TF in August and is currently operating it. About 10 employees provide customers with information related to the H-Share Index, early redemption methods, and conduct professional consultations. Shinhan Bank also launched a joint TF between headquarters and branches early in June and has assigned dedicated post-management staff by regional headquarters to strengthen customer communication.

These measures are in response to concerns that losses on H-Share Index-linked ELS products will become visible in the first half of next year. Banks heavily sold ELS-related products in 2021. When securities firms launch ELS products and asset management companies bundle several products into trust-type products, banks sell them in the form of ELT (Equity-Linked Trust) or ELF (Equity-Linked Fund) and receive commissions. ELS products incur losses if the underlying asset price at maturity falls typically more than 30% from the selling price. The H-Share Index, the underlying asset of H-Share Index ELS, closed at 6,103.34 the previous day, down about 39% compared to 2021 (average 10,044). Since ELS products generally have a maturity of three years, losses are expected to be certain in the first half of next year if the current trend continues.

According to the office of Rep. Yoon Han-hong of the National Assembly’s Political Affairs Committee, as of August, the outstanding balance of H-Share Index-linked ELS products sold by the five major domestic commercial banks (Kookmin, Shinhan, Hana, Woori, NongHyup) was KRW 14.5664 trillion, accounting for 71% of the total domestic issuance balance (KRW 20.5 trillion). Kookmin Bank holds the largest amount at around KRW 7.8 trillion, followed by Shinhan Bank at KRW 2.3 trillion, Hana and NongHyup Banks at KRW 2.1 trillion each, and Woori Bank at KRW 40 billion.

Focus on Mis-selling Issues... Are Banks Selling High-Risk Products Appropriately?

If losses are confirmed, whether mis-selling occurred is expected to become a key issue. It can be examined whether banks sufficiently explained the possibility of principal loss during the sales process and whether there was any improper solicitation. The banking sector believes the possibility of mis-selling is low. A representative from a commercial bank explained, “At the time of sale, the Financial Consumer Protection Act was about to be enforced, so procedures such as recording and handwritten signatures were strengthened.” This is why banks’ responses focus more on information provision and post-management rather than mis-selling.

On the other hand, experts emphasize the need to strengthen countermeasures related to mis-selling. Lee Hyo-seop, head of the Financial Industry Division at the Korea Capital Market Institute, said, “Complying with recording and handwritten signature procedures does not grant immunity,” adding, “It is necessary to examine whether there were any problems not only in product sales but also in product design, and whether explanations were sufficient enough for customers to recognize the actual risks.”

There is also a possibility that discussions will expand to whether the sale of high-risk products by banks is appropriate. Lee Bok-hyun, Governor of the Financial Supervisory Service, recently expressed a negative view during a parliamentary audit regarding ELS product sales, stating, “I personally have strong doubts about whether it is appropriate to sell complex high-risk derivative products to elderly customers at bank counters.” Lee emphasized, “A comprehensive review is needed on whether it is appropriate to sell products to deposit customers that could result in losses exceeding 50% of the principal.”

This content was produced with the assistance of AI translation services.