Financial Supervisory Service to Conduct 'On-site Inspections' of Hong Kong ELS Sellers Starting Next Week

Director Lee Bok-hyun's Press Corps New Year's Meeting
"Issues such as Some Sellers' Limit Management Failures"
Significant Reinforcement of Dispute and Complaint Response Personnel

Lee Bok-hyun, Governor of the Financial Supervisory Service, is holding a press conference on the 4th at the Financial Supervisory Service in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

The Financial Supervisory Service (FSS), which conducted an investigation targeting commercial banks and securities firms due to concerns over massive losses among investors in Hong Kong H Index-linked Equity-Linked Securities (ELS), has recognized issues such as inadequate management systems and incomplete sales practices at some distributors and will begin full-scale inspections starting next week. Additionally, anticipating an increase in ELS-related disputes, the Financial Consumer Protection Department has significantly reinforced its personnel to prepare thoroughly.

On the 4th, at a New Year's meeting with reporters held at the FSS headquarters in Yeouido, Seoul, FSS Governor Lee Bok-hyun stated, "Cases such as failure in limit management, sales drives through adjustments of Key Performance Indicators (KPI), and failure to retain contracts have been revealed at some distributors," adding, "We plan to conduct inspections targeting major distributors to accurately ascertain the facts."

ELS tracking the H Index have mainly been sold to individual investors through bank trusts (ELT) or direct sales by issuing securities firms (ELS). As of November last year, out of the total outstanding balance of H Index-based ELS amounting to 19.3 trillion KRW, 15.9 trillion KRW, or 82%, was sold through these channels. From January this year, ELS products that may pose problems due to knock-in (loss occurrence zones) are those issued since early 2021 when the H Index was at its peak. Considering the trend of the H Index, investor losses may begin to occur from January.

If distributor responsibility is confirmed through on-site inspections, sanctions are expected to be unavoidable. The previous investigation targeted major commercial banks including KB Kookmin, NH Nonghyup, SC First, Shinhan, and Hana, as well as securities firms such as KB Kookmin, NH Nonghyup, Mirae Asset, Samsung, Shinhan, Kiwoom, and Korea Investment & Securities. Governor Lee emphasized, "While investing under one’s own responsibility is the principle, if distributors who experienced past derivative-linked fund (DLF) incidents have provided investor protection merely as a formality, their responsibility is inevitable."

He also showed a willingness to improve systems to provide stronger protection for investors. Comprehensive improvements may be made, including the ELS sales decision-making process, incentive policies, and branch sales processes. Governor Lee explained, "Although formal requirements are met, consumers listen to explanations by clicking and signing for 30 to 40 minutes," adding, "We need to consider whether there is a way to effectively engage consumers so they can more easily understand what they need to know, including organizing the facts of individual cases. We believe this will be one of the important issues we need to address this year."

Earlier, the FSS reinforced personnel in the Dispute Mediation Division 3 within the Financial Consumer Protection Department in preparation for a surge in ELS-related dispute complaints. The Dispute Mediation Division 3 is responsible for mediating disputes related to financial investments. Key personnel from core departments within the FSS, including the Financial Group Supervision Office’s Holding Company Supervision Team, Bank Supervision Bureau, Bank Inspection Bureau, Financial Investment Inspection Bureau, and Corporate Disclosure Bureau, were reassigned as of the 9th.

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