Financial Authorities Focus on 'Banks' Responsible for Hong Kong ELS...Bankers' Low Understanding of Products

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Financial authorities are reportedly actively considering measures to strengthen the responsibility-sharing among banks in relation to the loss incident involving Hong Kong H Index (Hang Seng China Enterprises Index)-linked equity-linked securities (ELS). They also plan to closely examine whether bank employees selling ELS had a proper understanding of the products before proceeding with sales.

At the 'F4' meeting held on the 16th?a private discussion involving the Minister of Economy and Finance, the Chairman of the Financial Services Commission, the Governor of the Financial Supervisory Service, and the Governor of the Bank of Korea, focusing on macroeconomic and financial issues?various proposals regarding solutions to the ELS losses were reportedly exchanged.

A presidential office official stated on the 19th, "The Financial Supervisory Service is concretizing review plans related to compensation for the Hong Kong ELS, but no final plan has been submitted yet." However, based on a comprehensive report by Asia Economy, since over 80% of the total outstanding sales balance of Hong Kong ELS in the financial sector was sold by banks, and there are indications of some incomplete sales targeting elderly investors, it is highly likely that responsibility-sharing standards will be established by the end of this month and compensation will be made before the general election.

In particular, financial authorities are said to be focusing on whether there were any incomplete sales practices by bank employees in connection with the sale of Hong Kong ELS. A government official commented, "Despite ELS being high-risk and complex products, there appear to have been numerous cases where they were sold to elderly investors as if they were safe products with minimal loss risk. Banks prioritized performance-based sales by setting individual targets, which likely led to inadequate product explanations. Additionally, some employees with low understanding of certain products may have engaged in incomplete sales."

The reason financial authorities are placing greater emphasis on incomplete sales by banks is that a significant portion of ELS sales actually occurred through banks, and there are signs that warnings about risks were relatively less communicated compared to securities firms. According to the Financial Supervisory Service, as of November last year, the total outstanding sales balance of Hong Kong ELS in the financial sector was 19.3 trillion KRW, with 15.9 trillion KRW?over 80%?sold by banks.

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Financial authorities identify whether bank employees selling ELS have a sufficient understanding of the products as a key issue to be reviewed. Currently, to sell ELS at banks, employees must obtain a derivative product investment advisory qualification certificate administered by the Korea Financial Investment Association. However, the financial investment industry argues that merely holding this certificate does not guarantee a proper understanding of ELS products. Although 60% of bank employees hold the sales qualification certificate, there are criticisms that their actual product understanding is low.

Financial authorities are closely monitoring the ELS incident because elderly investors aged 65 and over account for as much as 30% of the outstanding balance of financial sector H Index ELS, and as losses are expected to increase before the April general election, there is a growing need to protect financially vulnerable groups. In particular, as banks that enhanced profits during the high-interest rate period have been criticized by investors for tacitly allowing some incomplete sales practices, it is known that authorities plan to encourage banks to voluntarily fulfill their social responsibilities going forward.

Regarding this, a Financial Supervisory Service official said, "We are conducting on-site inspections and complaint investigations on sellers such as Kookmin Bank related to Hong Kong H Index ELS. Based on this, various measures are being considered to provide relief to Hong Kong ELS subscribers, but no specific plan has been finalized yet." The official added, "We are currently conducting a second on-site inspection of 11 major H Index ELS sellers, including five banks and six securities firms. Since banks have a high proportion of ELS sales and a high likelihood of incomplete sales, focusing on banks is appropriate, but securities firms are not exempt."

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