Hong Kong ELS 'Sales Agent Sanction' Procedure... Financial Supervisory Service Notifies Banks of Opinion Letter

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The Financial Supervisory Service (FSS) is initiating disciplinary procedures against sellers of Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS) based on inspections conducted from the beginning of the year until the 8th of last month. In the dispute mediation standards announced last month, the responsibility of sellers was specified as one of the causes of large-scale losses among Hong Kong H Index subscribers, and fines, institutional sanctions, and employee sanctions were forewarned.

According to the FSS on the 7th, the relevant departments plan to officially deliver inspection opinion letters to banks, securities firms, and other sellers of Hong Kong H Index ELS from the second week of April and request official responses regarding detailed inspection results. The inspection opinion letters and official responses will be used as basic materials for procedures such as disciplinary reviews to be conducted in the future.

The FSS will first confirm inappropriate sales targets and deficient sales systems of banks and clarify the responsibility of sellers. Accordingly, it plans to send audit opinion letters to banks, including KB Kookmin Bank, which accounts for 80% of the total sales volume, as well as Shinhan Bank, Hana Bank, NH Nonghyup Bank, and SC First Bank. A financial authority official explained, "Once official responses are received from sellers based on the opinion letters, an internal review will be conducted to further refine any violations."

After the process of collecting responses from sellers is completed, the FSS will prepare the final inspection report and refer it to the disciplinary review procedure. Subsequently, the financial authorities will finalize sanctions against sellers through resolutions by the Disciplinary Review Committee, the Securities and Futures Commission, and the Financial Services Commission. A senior financial authority official stated, "How the FSS initially concludes will influence the Financial Services Commission's resolution," adding, "Nothing has been shared yet at the FSS and working-level departments."

Sanctions against Hong Kong H Index ELS sellers are expected to be broadly divided into institutional sanctions, employee sanctions, and fines. Considering that the total sales volume reaches 18.9 trillion KRW and that voices criticizing supervisory and seller responsibilities continue despite major commercial banks deciding on voluntary compensation, there are likely many factors to consider.

The scale of fines is likely to be mitigated as sellers have decided on voluntary compensation. The Financial Consumer Protection Act stipulates that fines of up to 50% of sales can be imposed if incomplete sales are confirmed; however, FSS 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 at around 2 trillion KRW, which is about 40% of the losses (loss rate approximately 50%) on ELS products maturing from January to July this year (about 10 trillion KRW).

Lee Bok-hyun, Governor of the Financial Supervisory Service, is announcing the dispute mediation guidelines related to large-scale losses of Hong Kong H Index-linked ELS at the Financial Supervisory Service in Yeouido, Seoul on the 11th. Photo by Kang Jin-hyung aymsdream@

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Meanwhile, banks that decided on voluntary compensation one after another at the end of last month are reinforcing or newly establishing internal dedicated organizations and accelerating compensation. 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 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 negotiate with subscribers. In the case of KB Kookmin Bank, since there are about 80,000 accounts maturing from January to July this year, it plans to first contact subscribers whose losses have been confirmed. A KB Kookmin Bank official explained, "We are calculating preliminary compensation ratios for subscribers with confirmed losses," adding, "Once negotiations are complete, we have prepared procedures to complete payments within a week."

NH Nonghyup Bank is proceeding with procedures such as analyzing overall subscriber information and establishing compensation amount calculation processes, and Woori Bank, which decided on voluntary compensation first, will start individual negotiations with subscribers whose maturity dates are approaching from the 12th. SC First Bank plans to soon form a voluntary compensation committee and conduct negotiations with subscribers.

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