Hong Kong ELS Seller's 'Sanction Procedure' Begins in Earnest, 'Inspection Opinions' Delivered to Banks

The Financial Supervisory Service Delivers 'Inspection Opinion Letters' to Major Commercial Banks This Week
Specifying Facts Such as Sales Agency Responsibility, Preparing Disciplinary Review Proposals After Additional Review of Sales Agency Opinions
Disciplinary Review Meeting Expected as Early as May, Bank Sector's Voluntary Compensation Decision Likely to Reduce Fine Levels

Financial authorities are set to intensify disciplinary procedures against sellers of Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS). Following the issuance of the 'Inspection Opinion Letter,' which contains the review results related to illegal and irregular activities identified during the complaint investigation and on-site inspections conducted over two months from January to early March, substantive disciplinary review procedures are expected to commence as soon as official responses are received from the sellers.

According to financial authorities on the 8th, the Financial Supervisory Service (FSS) plans to deliver the 'Inspection Opinion Letter' to major commercial banks that sold Hong Kong ELS, including KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and SC First Bank, this week. An FSS official explained, "We will deliver the Inspection Opinion Letter to major banks and request official responses." The FSS conducted inspections on six securities firms, including Korea Investment & Securities, Mirae Asset Securities, KB Securities, NH Investment & Securities, and Shinhan Securities, as well as the five major commercial banks, from January 8, when large-scale losses from Hong Kong ELS became apparent, until last month’s 8th.

The Inspection Opinion Letter contains factual details related to violations of sales principles such as suitability requirements, real-name obligations, and prohibition of unfair solicitation, which were detected through prior complaint investigations and on-site inspections by the FSS. It also highlights system issues identified during on-site inspections, such as inadequate sales management systems and inappropriate setting of sales targets (KPIs). After delivering the Inspection Opinion Letter, the FSS plans to create disciplinary action proposals after further review once official opinions are received from the sellers.

Once the disciplinary action proposals are finalized, the FSS is expected to hold a disciplinary review committee meeting as early as May. On the 3rd, FSS Governor Lee Bok-hyun emphasized the importance of swiftly proceeding with the disciplinary procedures to resolve uncertainties in the financial sector. After the disciplinary review committee meeting, the sanctions will be finalized through resolutions by the Securities and Futures Commission and the Financial Services Commission. A senior official from the Financial Services Commission stated, "Ultimately, how the FSS reaches its initial conclusion will influence the Financial Services Commission’s resolution," adding, "So far, nothing has been shared at the working-level between the FSS and the Financial Services Commission."

[Image source=Yonhap News]

Disciplinary actions against Hong Kong H Index ELS sellers are expected to be broadly categorized into institutional sanctions, sanctions against executives and employees, and fines. Considering the total sales volume reaches 18.9 trillion KRW and that voices from subscribers criticizing supervisory and seller responsibilities continue even after major commercial banks decided on voluntary compensation, there are likely to be many factors to consider.

However, the scale of fines is likely to be mitigated as sellers have decided on voluntary compensation. The Financial Consumer Protection Act allows fines of up to 50% of the sales amount if incomplete sales are confirmed, but Governor Lee Bok-hyun has expressed the view that if sellers take appropriate restoration measures, it is natural to consider this as a mitigating factor for sanctions and fines. The financial sector estimates the compensation amount to be around 2 trillion KRW, which is approximately 40% of the losses (loss rate about 50%) on ELS products maturing from January to July this year (about 10 trillion KRW).

Meanwhile, banks that decided on voluntary compensation one after another at the end of last month are reinforcing or establishing dedicated internal teams and accelerating compensation efforts. Following Hana Bank’s first voluntary compensation case on the 29th of last month, Shinhan Bank also paid compensation to 10 subscribers on the 4th. These commercial banks have formed voluntary compensation committees including experts and strengthened practical support departments, showing swift action.

KB Kookmin Bank and NH Nonghyup Bank, which have the largest sales volumes, also plan to sequentially form voluntary compensation committees and begin negotiations with subscribers. In the case of KB Kookmin Bank, since there are about 80,000 accounts maturing from January to July this year, they plan to prioritize contact with subscribers whose losses have been confirmed. A KB Kookmin Bank official explained, "We are calculating preliminary compensation rates for subscribers with confirmed losses," adding, "Once negotiations are complete, we have procedures in place to complete payments within a week."

NH Nonghyup Bank is proceeding with procedures such as analyzing all subscriber information and establishing compensation calculation processes, while Woori Bank, which was the first to decide on voluntary compensation, will begin individual negotiations with subscribers whose contracts mature starting from the 12th. SC First Bank plans to soon form a voluntary compensation committee and conduct negotiations with subscribers.

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