Financial Services Commission Returns Hong Kong ELS Sanction Proposal... Tensions Between Commission and Supervisory Service Resurface

FSC Requests Re-examination After Three Months Without a Conclusion
First Major Intervention in Eight Years Since Samsung BioLogics Case
Both Sides Recognize Need to Reduce Fines, FSS Says "No Discretionary Authority for Mitigation"
Subtle

The Financial Services Commission (FSC) has returned the Financial Supervisory Service (FSS)'s proposed disciplinary measures regarding the incomplete sale of equity-linked securities (ELS) tied to the Hong Kong H-Index (Hang Seng China Enterprises Index, HSCEI) by banks. This is the first time in eight years that the FSC has pushed back against a major disciplinary proposal from the FSS, the last instance being its call for a re-audit of Samsung Biologics's accounting standards violation in 2018. Both inside and outside the financial authorities, there is a growing assessment that the delicate tension between the FSC and the FSS has resurfaced.

Yi Okwon, Chairman of the Financial Services Commission (left), and Lee Chanjin, Governor of the Financial Supervisory Service, are attending and conversing at the full meeting of the Political Affairs Committee held at the National Assembly last February. 2026.2.5 Photo by Kim Hyunmin

According to the financial authorities on May 14, the FSC convened a regular meeting the previous day, raised the agenda regarding the incomplete sale of Hong Kong H-Index ELS, and requested that the FSS review the matter again. The FSC stated, "We have requested the FSS to supplement certain facts and the application of relevant laws and legal principles based on the results of inspections of banks and securities companies."

Previously, in February, the FSS approved a total of 1.4 trillion won in fines and institutional warnings against five banks—KB Kookmin, Shinhan, Hana, NH Nonghyup, and SC First Bank—for the incomplete sale of Hong Kong ELS. The FSS’s disciplinary proposals are typically finalized at regular meetings after review by the FSC's agenda subcommittee and others. However, the FSC has been unable to reach a conclusion for three months after receiving the proposal, fueling ongoing speculation over the size of the fines. Ultimately, the FSC’s request for further factual clarification means it has officially determined that it cannot accept the FSS’s original plan as is.

This move by the FSC to request a re-examination after much deliberation is believed to be due to concerns about the size of fines set by the FSS. If the fines are finalized as originally proposed by the FSS, it could weaken the capital adequacy of the banking sector. There are concerns that this may clash with the "productive finance" policy direction being promoted by the Lee Jaemyung administration. Another factor is the recent series of losses by the financial authorities in administrative lawsuits against financial companies, which has also added to the burden.

On the other hand, the Hong Kong ELS incident holds significant symbolic meaning as the first major disciplinary case since the Financial Consumer Protection Act came into force in 2021. The FSC is also concerned that excessively lowering the fines could send the wrong signal to the financial sector. Amid this dilemma, there has been a consensus within the FSC that the fines originally proposed by the FSS were excessive.

Within the FSS as well, there is a shared view that the burden on the banking sector should be reduced. This is due to the need to consider banks’ voluntary compensation efforts and the productive finance policy direction. FSS Governor Lee Chanjin is also reported to have recently commented at an external event that the fine burden on banks concerning Hong Kong ELS should be eased for the sake of productive finance. However, since the FSS does not have the discretionary authority to reduce fines ("discretionary mitigation"), its position has consistently been that any final adjustment falls under the jurisdiction of the FSC.

A senior financial authority official stated, "The FSS governor has to defend the logic of the Sanctions Review Committee, but during the FSC’s deliberations, he was in favor of reducing the fines," adding, "The FSC’s demand for supplementation is understood to be the result of discussions between the FSS governor, who also participates as a commissioner in the FSC's regular meetings, and the FSC itself."

The key issue now is to what extent the FSS will adjust the size of the fines during the review process.

An FSS official stated, "There is a possibility that the fines could be adjusted during the process of supplementing the facts," adding, "If new circumstances arise, there is also a possibility that the Sanctions Review Committee may be reconvened." The official continued, "We aim to complete the review as quickly as possible so it can be discussed at the next meeting."

It has been reported that the current disciplinary proposal includes issues such as the risk rating classification and application by banks, and breaches of the duty of explanation by securities companies, and that similar sentencing standards were applied to otherwise different types of cases. Therefore, some supplementation is deemed necessary. However, since the issues are largely technical, the FSS believes the actual scope for reduction will be limited.

A financial industry official commented, "Ultimately, the FSC’s request for a review of the Hong Kong ELS disciplinary proposal seems to suggest the possibility of a significant reduction in fines," adding, "The divergence in perspectives and uncomfortable dynamics between the FSC and the FSS, which have persisted over various issues such as financial company governance reforms, have resurfaced in this case as well."

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