[Financial Microscope] Hong Kong H-Share Index ELS sanctions review to conclude on the 12th... How much will banks' fines be reduced?

Lee Chanjin: "Banks' post-incident remediation and voluntary compensation efforts will be reflected"
Banks set aside 30-50% in provisions... Sanctions expected to be eased
Dispute over breach of duty to explain... Court rulings a key variable

The financial supervisory authorities are expected to finalize, as early as the 12th, the level of sanctions against banks in connection with the controversy over the mis-selling of equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index (HSCEI), also known as the Hong Kong H-Share Index. As Lee Chanjin, Governor of the Financial Supervisory Service, has stated that he will reflect banks' voluntary compensation and post-incident remediation efforts in the sanctions, attention is focusing on how much the previously pre-notified fines, which are in the 2 trillion won range, will be adjusted.

Lee Chanjin, Governor of the Financial Supervisory Service

Conclusion as early as the 12th... Lee Chanjin: "Banks' post-incident remediation efforts will be reflected in the sanctions review"

According to the supervisory authorities on the 11th, the Financial Supervisory Service plans to hold the third Sanctions Review Committee on the 12th for the banks that sold Hong Kong H-Share Index ELS products. The five banks concerned are KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea. Previously, in November last year, the Financial Supervisory Service had pre-notified these banks of fines totaling 2 trillion won. The final amount of the fines is expected to be decided at this sanctions review meeting.

In this regard, Governor Lee has indicated that he intends to sufficiently take into account the banks' post-incident response efforts in the sanctions review. Announcing this year's work plan for the Financial Supervisory Service on the 9th, he said, "This case involves a large scale of consumer damage and is a representative case of mis-selling to retail investors," but added, "We will reflect banks' post-incident remediation and voluntary compensation efforts in the sanctions review."

In the financial sector, these remarks are being interpreted as suggesting that the total fine may be reduced from the level initially notified. In fact, in line with the dispute settlement proposal of the Financial Supervisory Service, the banks have already completed voluntary compensation totaling 1.3 trillion won for more than 90% of all victims.

Governor Lee has also recently sent a message in the National Assembly that the ELS fines should not place an excessive burden on banks' lending capacity. During a report to the National Policy Committee on the 5th, he said, "We will be mindful to ensure that the Hong Kong ELS fines do not disrupt banks' provision of productive finance," adding, "We will maintain the same awareness of this issue not only at the sanctions review stage but also at the Financial Services Commission stage." This is being interpreted as an intention to calibrate the level of fines so that they do not exert excessive pressure on banks' capital ratios and lending capacity.

Banks set aside 30-50% of expected ELS fines as provisions... Reflecting possible reduction

The banks have already accumulated substantial provisions in preparation for the outcome of the sanctions. KB Kookmin Bank has set aside about 260 billion won in provisions out of fines estimated in the 1 trillion won range, while Hana Bank has accumulated around 90 billion won, which is about 30% of fines estimated in the 300 billion won range. Shinhan Bank has reflected approximately 150 billion won in provisions, which is about half of its fines estimated in the 300 billion won range.

NH Nonghyup Bank is reported to have been notified of fines in the 200 billion won range, and Standard Chartered Bank Korea in the 100 billion won range. Among them, Standard Chartered Bank Korea is said to be the only bank that has reflected the entire amount of the notified fines in its provisions.

Provisions are amounts set aside in advance to prepare for potential future expenses or losses. Considering that the total fines are expected to reach 2 trillion won, some analysts say that the banks' provisioning ratios partially reflect the possibility that the fines may be reduced to less than half in the upcoming sanctions review.

An official at a commercial bank explained, "Since the procedures of the Securities and Futures Commission and the Financial Services Commission will remain even after the sanctions review, we have reflected the amount at a reasonable level by taking into account external legal advice and the views of external auditors."

Key remaining issues in the sanctions review

The core issue in the sanctions review, which is now just a day away, is whether the banks violated their duty to explain the products to investors. The Financial Supervisory Service is taking issue with the fact that the banks arbitrarily shortened the loss-risk analysis period from the existing 20 years to 10 years. Under the standards of the Financial Supervisory Service, financial institutions must present the price fluctuation trends and results of return simulations for the most recent 20 years. In response, the banks are mounting their defense based on how these standards should be applied and interpreted.

The courts' rulings are also being cited as a variable. The Seoul District Court previously ruled, in a damages lawsuit filed by an investor in Hong Kong H-Share Index ELS against a bank, that it was difficult to view the case as a violation of the duty to explain. The investor in question reportedly had an investment principal of 2 billion won and had invested in ELS products 13 times in the past.

However, the Financial Supervisory Service maintains that it is difficult to directly link this ruling to the current sanctions review and generalize from it. An official at the Financial Supervisory Service said, "In that case, the investor had a high level of understanding of ELS products and therefore should not be compared on the same footing as ordinary victims," adding, "The court ruling also concerned a case that occurred before the enforcement of the Financial Consumer Protection Act, so the criteria for judgment are completely different from those for this sanctions review."

Even after the sanctions review results are finalized, there remains the possibility that the size of the fines may be further adjusted in the subsequent procedures at the Financial Services Commission.

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