Hong Kong ELS 'No Unconditional Compensation'... Detailed Compensation Plan Specified

The scale of equity-linked securities (ELS) tracking the Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) that have matured exceeds 1 trillion won, with confirmed losses also surpassing 600 billion won. In this context, financial authorities are expected to present compensation guidelines for sales companies as early as next week. The Financial Supervisory Service (FSS) is also expected to disclose the results of the first and second rounds of inspections conducted on banks and securities firms, drawing keen attention to specific cases of incomplete sales and detailed compensation standards.

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According to financial authorities on the 21st, the FSS has completed the second on-site inspections of five banks and six securities firms and is moving forward with establishing concrete compensation criteria. Having detected signs of incomplete sales during the first on-site inspection, the FSS is reportedly scrutinizing the subscription processes of elderly investors without prior investment experience through the second inspection.

The guideline to be proposed by the financial authorities is likely to focus on elderly financial consumers who first decided to invest in ELS when the Hong Kong H Index passed its peak in 2021. Compensation may be differentiated or excluded for those with previous investment experience or those who made investment decisions through online channels rather than face-to-face.

According to the FSS, the proportion of investors who subscribed to Hong Kong H Index ELS through offline channels was 94.3% at banks and 27.9% at securities firms. Investors aged 65 and older accounted for 31.1% at banks and 27.2% at securities firms, while first-time investors were 9.2% and 7.7%, respectively. The number of cases varies greatly depending on the sales company, age group, investment experience, face-to-face or non-face-to-face channels, and whether incomplete sales occurred.

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Therefore, unlike the 2019 derivative-linked fund (DLF) incident where a basic compensation rate of 20% of the loss amount and a maximum of 80% loss compensation standard were applied, it is unlikely that all investors will receive uniform compensation simply because investment losses occurred. This is because cases where incomplete sales were confirmed during the process of financial consumers without derivative product investment experience deciding to invest through face-to-face channels are likely to serve as the standard.

A banking industry official said, "Unlike the DLF incident, it is unlikely that a uniform minimum standard will be presented," adding, "It is possible that the guidelines will be prepared based on cases where incomplete sales were confirmed."

The FSS plans to continuously refine the compensation plan based on the results of the second on-site inspection. They intend to establish clearer standards by comparing signs of incomplete sales identified in the first on-site inspection with statements confirmed during complaint investigations. An FSS official explained, "We are reviewing various measures to provide relief to Hong Kong ELS subscribers based on on-site inspections and complaint investigations," and added, "We are promoting swift dispute resolution in accordance with the Financial Consumer Protection Act."

Meanwhile, among the Hong Kong ELS sold by the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?the products that matured by the 15th amounted to 1.1746 trillion won. With a confirmed loss rate exceeding 54%, the repayment amount was only 538.4 billion won. The confirmed loss amount reached approximately 630 billion won.

The maturity of Hong Kong ELS is concentrated at 3.9 trillion won in the first quarter and 6.3 trillion won in the second quarter, totaling 10.2 trillion won in the first half of the year. If the Hong Kong H Index continues to fluctuate around the 5,400 level, the confirmed loss amount is expected to exceed 1 trillion won by February and could expand to 4 to 5 trillion won during the first half of the year.

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