[Hong Kong ELS Compensation] The Many Faces of "Mis-selling"... "Is It Okay for Banks to Do This?"

Excessive Sales Targets During Loss Risk Expansion Period
Neglect of Consumer Protection by Banks, Securities Firms, and Other Sellers
Comprehensive Failures Including Proxy Subscriptions, False Recordings, and Document Forgery

"Sales companies encouraged company-wide sales through excessive sales targets and inappropriate performance indicators during periods of increased customer loss risk, while neglecting sales limit management for consumer protection and the operation of non-deposit product committees, thereby creating an environment conducive to incomplete sales."

This is the conclusion reached by the Financial Supervisory Service (FSS) on the 11th after conducting on-site inspections and complaint investigations over two months since January on major banks and securities firms regarding Hong Kong H-Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS).

According to the results of on-site inspections and complaint investigations conducted by the FSS from January 8 to March 8 on six banks including Kookmin, Shinhan, Hana, Nonghyup, SC, and six securities firms including Korea Investment & Securities, Mirae Asset, Samsung, KB, NH, and Shinhan, one might think, 'Can banks really operate like this?'

A sales staff member at H Bank, after informing an investor that they could not subscribe to an ELT due to a risk-neutral investment propensity analysis result, quietly prompted the investor to say 'I want to subscribe to this product', violating the suitability principle. Additionally, a sales staff member at I Bank recommended ELT subscription to an investor over the phone, but when the investor said visiting was difficult, the sales staff completed and signed the investment propensity questionnaire, product description, and subscription application without the customer's visit, and during the recording of the sales process, another staff member falsely acted as the customer.

A sales staff member at J Bank, during the investment propensity analysis of an 87-year-old elderly investor, guided the investor by saying, "If you check that you prefer deposits, you cannot subscribe, so we upgraded your investment propensity to allow subscription." Furthermore, a sales staff member at S Bank repeatedly requested the 87-year-old investor, who said they could neither hear nor understand well due to hearing impairment, to respond 'I understand' and distorted the explanation of the 'early termination fee' by saying it meant 'you should not terminate if possible.'

[Image source=Getty Images]

Cases of document forgery were also confirmed. A sales staff member at K Bank, while recommending ELS re-subscription to a customer visiting on behalf of their spouse, forged the issuance date of a family relation certificate that had expired without confirming the subscriber's intention, and completed the subscription. The FSS stated, "Although regulations require confirming and recording the subscriber's intention during proxy subscription, there was no procedure to check files afterward," indicating internal control issues.

The FSS focused first on the headquarters' 'inappropriate sales target setting' and 'insufficient customer protection management system,' and conducted investigations into various incomplete sales such as proxy subscriptions, neglect of elderly protection, and document forgery occurring during the sales process at frontline branches.

The FSS inspection results showed that despite heightened uncertainty due to global stock index volatility amid the COVID-19 pandemic in 2020, the sales headquarters continued aggressive sales with excessive sales targets and promotions. While performance evaluation indicators (KPIs) were quantitatively aligned to sales, sales limits were indirectly increased, and the operation of non-deposit product committees was neglected, indicating that internal control systems were not functioning adequately.

Bank A raised its WM (Wealth Management) fee trust fee target by 56.9% compared to 2020 when setting sales targets in 2021. Bank B conducted two promotions in the first quarter of 2021 when the Hong Kong H-Index was at its peak and encouraged performance competition by posting performance data on the company bulletin board. Additionally, if a knock-in did not occur, some branches recognized the ELS yield (coupon) at the time of sale as the branch KPI even if the H-Index declined, or evaluated up to twice the trust fee as performance profit for high-risk specific money trusts such as equity-linked trusts (ELT), inducing sales of high-risk products.

Some banks applied customer-specific limit management standards by ELS issuance, resulting in high-value multiple subscriptions. Bank C had as many as 1,620 individual investors with overlapping subscriptions of 300 million KRW or more in two or more cases. Another Bank D relaxed internal risk management standards that required reducing sales limits when stock index volatility increased, significantly raising sales limits and setting exception limits, thereby increasing defaults.

Omission of investor propensity analysis items and sale of Hong Kong ELS to unsuitable investors

There were defects even in the basic procedures of analyzing investor propensity to exclude unsuitable investors and fulfilling the obligation to explain and provide explanatory documents to suitable investors. Although investor propensity analysis must mandatorily consider and verify six items, some items were omitted or scores were not assigned.

The FSS inspection found that Bank E did not assign evaluation scores to the 'transaction purpose' item during investor propensity analysis, resulting in the investment propensity evaluation not being affected even if investors selected 'retirement fund preparation' or 'short-term operation purpose.' Also, investors wishing for 'principal preservation' could subscribe to ELS if their asset size and income level met criteria, and investors responding with an investment period of 'less than one year' were allowed to subscribe based on other evaluation results.

Numerous cases of omitted investment risk and inadequate explanation obligations

Many cases were found where sales companies omitted or distorted investment risks such as loss risk scenarios and risk grade precautions that must be explained when selling investment products. Banks distorted or omitted important investment risk details from the securities prospectus (investment explanatory document) prepared by the ELS issuer (securities firm) during the explanation and delivery of self-prepared asset management explanatory documents at ELT contract signing.

The FSS inspection revealed that Bank F arbitrarily changed the loss risk analysis period from 20 years stated in the issuer's securities prospectus to 10 years in the asset management explanatory document, reducing the loss occurrence rate to 0%, excluding the 2007 global financial crisis period. This bank also reportedly encouraged sales branches to describe the product as safe through distributed guidance materials and solicitation scripts. Bank G omitted the important 'risk grade precautions,' which must be explained to financial consumers under the Financial Consumer Protection Act and placed at the front of explanatory documents.

Additionally, cases were found where high-difficulty product summary explanatory documents were not provided to investors, and asset management explanatory documents were not stored despite the obligation to keep solicitation materials for 10 years. Some banks set processes to record only parts of the contract signing process, although the entire 'contract conclusion process' must be recorded to capture actual solicitation and explanation.

The poor sales systems of banks and securities firms caused numerous incomplete sales in individual sales processes. The FSS stated that various incomplete sales such as violations of suitability principles, explanation obligations, proxy subscriptions, neglect of elderly protection, and document forgery were confirmed during the sales process. It pointed to headquarters policies such as excessive performance evaluation indicators at branches, shortened ELT issuance sales periods, and significant increases in trust fee targets as the background for violations.

Gilsungju, Chairman of the Hong Kong ELS Victims' Association, is speaking at a press conference for victims of the Hong Kong index-based ELS damage incident held at the National Assembly Communication Office on the 30th. Photo by Hyunmin Kim kimhyun81@

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