[Hong Kong ELS Compensation] Financial Authorities Consider Restrictions on High-Risk Financial Product Sales

Bank Performance Evaluation Indicators and Plans to Link with Customer Benefits

Lee Bok-hyun, Governor of the Financial Supervisory Service, is entering the Financial Supervisory Service in Yeouido, Seoul, on the 11th to announce the dispute mediation guidelines related to large-scale losses of Hong Kong H-index linked ELS. Photo by Kang Jin-hyung aymsdream@

Following the large-scale loss incident involving Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI)-based equity-linked securities (ELS), authorities are reviewing various scenarios, including restrictions on banks' sales of complex financial products. There are also plans to link banks' performance evaluation indicators (KPIs) to customer benefits.

According to the financial sector on the 14th, as the Financial Supervisory Service's on-site inspections conclude, financial authorities are closely examining the sales systems and processes of complex investment products in banks, such as ELS based on the Hong Kong H Index. Given the recurrence of similar incidents like the KIKO (Knock-In Knock-Out) crisis and overseas interest rate-linked derivative-linked securities (DLF) incidents, they have begun institutional improvements related to the sale of complex financial products.

A Financial Services Commission official stated, "Of course, both sides have issues, but we are at the stage of examining whether there were institutional limitations in the current Financial Consumer Protection Act or problems in the sales practices at frontline branches," adding, "Since the matter is serious, we will prepare countermeasures at an appropriate time by referring to overseas cases."

Revisions to the bank KPI system, which is overly focused on performance, are also expected. Lee Bok-hyun, Governor of the Financial Supervisory Service, said to reporters the day before, "We are communicating with the FSC about ways to link employee performance evaluations to customer benefits," and added, "Within this month, we will form a task force (TF) involving authorities, industry, academia, and consumers to produce tangible results within the year."

A banking sector official said, "Currently, since the core of KPIs lies in the bank's profits, employees inevitably focus on sales volume itself rather than customer benefits," and added, "Regarding financial product sales, the system should be improved so that higher scores are given when customer benefits increase, and conversely, lower scores when customer losses increase."

Banning the sale of complex financial products is also among the options being discussed. In 2019, financial authorities had completely banned banks from selling complex private funds and trusts with a risk of principal loss exceeding 20%, but due to opposition from the banking sector, exceptions were made for ELS, where problems have recurred. However, there are concerns that this could infringe on consumers' rights to financial investment choices and accessibility.

[Image source=Yonhap News]

Measures to restrict sales channels are also continuously being proposed. For example, limiting the handling of financial products like ELS to wealth management (WM) centers accessible only to clients with substantial assets, or separating financial investment counters from deposit and savings counters even within branches.

However, there are criticisms that restricting sales channels is not a fundamental solution. Kim Deuk-ui, head of the Financial Justice Solidarity, said, "During the Lime Asset Management incident, Shinhan Bank connected customers to Shinhan Financial Investment staff through the PWM Center, a complex branch, and the staff persuaded customers to subscribe to funds," adding, "Even if sales channels are limited to key branches or counters are separated, similar incidents are likely to recur over time."

Kim further stated, "If channels are to be restricted, it would be appropriate to limit them to online channels," explaining, "Unlike sales branches where solicitation occurs, online channels allow aggressive investors who want to invest in complex financial products to select products themselves, making them relatively free from incomplete sales controversies."

However, some argue that despite various measures, similar problems are inevitable under the current banking industry structure focused on domestic retail finance. An official from the authorities said, "Even with continuous enactment of laws like the Financial Consumer Protection Act, incomplete sales issues persist fundamentally because banks have a revenue structure that requires selling complex financial products to expand profits beyond the interest margin," adding, "A fundamental solution is needed, such as maintaining retail banking like global banks while strengthening investment banking (IB) and corporate finance sectors and diversifying overseas expansion."

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