[Hong Kong ELS Compensation] Banks in Dilemma... Voluntary Compensation? Dispute Mediation?

Financial Supervisory Service Dispute Resolution Standards: A Structure Most Banks Must Follow
Busy Reviewing FSS Standards and Estimating Expected Compensation Mainly Through Internal TF
Banks Concerned About 'Breach of Trust' Case Escalation and Uncertainty Over Sanctions Like Fines

The financial sector is deeply concerned about accepting the Financial Supervisory Service's (FSS) proposed dispute resolution standards for Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS). In particular, banks are swiftly placing the standards on their board meeting agendas, as the level of voluntary compensation under the standards is likely to be linked to sanctions such as fines. They are also pushing forward with estimating the expected total compensation and conducting legal reviews of its validity, centered around internal task forces (TFs).

According to the financial sector on the 13th, major commercial banks have begun the process of estimating the expected total compensation amount based on the FSS's dispute resolution standards, led by internal TFs related to Hong Kong ELS. Once the expected total compensation is calculated, the internal TFs plan to prepare future response measures and submit them as resolutions to the board of directors. A representative from a commercial bank explained, "We are first reviewing the standards proposed by the FSS," adding, "We need to estimate the expected compensation based on the previously established TF and conduct multifaceted legal reviews."

The time for banks to decide whether to accept the FSS's dispute resolution standards is not ample. The financial authorities have repeatedly recommended 'private settlements' this year, and the FSS plans to accelerate dispute resolution procedures by holding dispute resolution committee meetings focusing on representative cases of incomplete sales starting early April. Therefore, there is no room for leisurely internal decision-making. Even if banks decide to accept the standards and provide voluntary compensation, the significance may be diminished as the FSS's representative case dispute resolution committee will overshadow it.

The FSS's representative case dispute resolution committee follows procedures including additional fact-finding and review as needed → referral to the dispute resolution committee → notification of the resolution decision → acceptance or rejection by the parties involved → establishment of the resolution if both parties accept. Since this process typically takes about 2 to 3 months, actual compensation through the committee is likely to begin as early as June.

Accordingly, banks have consecutively signed advisory contracts for legal reviews of the FSS's dispute resolution standards and individual Hong Kong ELS subscription cases. KB Kookmin Bank has started consulting with the law firms Kim & Chang and HwaWoo, Shinhan Bank with HwaWoo, Hana Bank with Yulchon and Sejong, and NH Nonghyup Bank is seeking advice from Sejong and Kwangjang.

Moreover, even if voluntary compensation is chosen, the banking sector does not rule out the possibility that the Hong Kong ELS compensation decision could escalate into a 'breach of trust' issue. The decision by banks to voluntarily compensate subscribers essentially means they are acknowledging the responsibility of the sellers themselves. There is concern that this could work against them in lawsuits against management. Another commercial bank official evaluated, "This ELS dispute resolution standard is very detailed and allows for case-by-case approaches considering both sellers and customers, which is favorable," but added, "Since there are so many diverse cases per subscriber, comprehensive legal reviews as well as additional legal reviews for each case will be necessary."

Uncertainty over sanctions such as fines to be decided by the disciplinary committee starting next month is also a burden for banks. The outstanding balance of Hong Kong ELS maturing this year is 18.8 trillion won, and if the Hong Kong H Index maintains its recent level, the FSS estimates the cumulative loss amount to reach 5.8 trillion won. Under the current Financial Consumer Protection Act, the criteria for imposing fines on sellers for incomplete sales can be up to 50% of the sales amount.

In response, Kim Joo-hyun, chairman of the Financial Services Commission, told reporters after the 'Rapid Credit Recovery Support Event for Low-income and Small Business Owners' held at the Bankers' Hall in Jung-gu, Seoul, on the 12th, "The intention is to create reasonable standards and handle things efficiently, so I don't know if the breach of trust issue will arise," dismissing concerns by saying, "There is institutional room for consideration."

The banking sector is cautious about publicly discussing the disclosed dispute resolution standards and future voluntary compensation plans. Cho Yong-byeong, chairman of the Korea Federation of Banks, regarding the sale of high-risk financial products such as ELS, stated, "As the banking industry moves toward asset management, we must be careful and strive to ensure that customers' choices are not narrowed," but on compensation plans, he only expressed, "This is just the starting point of discussions, and we will communicate with the authorities and banks going forward." A financial sector official analyzed, "Since the FSS's standards are not absolute, there is always potential for disputes over details," adding, "Who and how will proceed with voluntary compensation will be the biggest issue within the banking sector going forward."

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