Despite Court Ruling... Hong Kong ELS Sanctions Review to Proceed to Third Round

The decision on sanctions against banks related to the misselling of Hong Kong H Index (Hang Seng China Enterprises Index) equity-linked securities (ELS) has been postponed once again. The issue is scheduled to be revisited at the third Financial Supervisory Service (FSS) Sanctions Review Committee meeting on February 12. Although the court has acknowledged a certain degree of investor responsibility in its ruling and the banks have provided explanations regarding this, the FSS has maintained its stance that the banks bear significant responsibility.

On the afternoon of the 9th, investors in Hong Kong H Index (Hang Seng China Enterprises Index) based equity-linked securities (ELS) are urging for compensation for damages in front of the Financial Supervisory Service in Yeouido, Yeongdeungpo-gu, Seoul. Photo by Yonhap News

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On January 29, the FSS held its second sanctions review targeting five banks: KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea.

Previously, the FSS had pre-notified a total fine of 2 trillion won. KB Kookmin Bank, with the largest sales volume, faces a fine of about 1 trillion won, while Shinhan Bank, Hana Bank, and NH Nonghyup Bank are each expected to be fined around 300 billion won, and Standard Chartered Bank Korea around 100 billion won.

It is reported that at the sanctions review held the previous afternoon, there was little discussion about reducing the previously notified fines. The content of the discussions was similar to that of the first sanctions review.

Although the court did not recognize a breach of the duty to explain by the banks in the civil lawsuit over losses from Hong Kong H Index ELS investments, the FSS reportedly maintained its previous argument in the second sanctions review, insisting that the banks did violate their duty to explain.

Earlier, on January 16, the Seoul Central District Court ruled against an individual investor who filed a damages claim against KB Kookmin Bank, stating that, in principle, investors themselves are responsible for judging the potential gains and losses arising from future index fluctuations.

The court also dismissed the claim that the bank failed to present the price fluctuation trends of the underlying assets over the past 20 years and the results of related yield simulations, stating that such standards apply to securities firms, not banks.

However, the FSS has continued to cite the banks’ failure to provide '20-year yield simulation results' as grounds for sanctioning them for violating their duty to explain, and it reportedly maintained this stance in the second sanctions review.

A financial industry official familiar with the matter said, "It is difficult to pinpoint the FSS’s exact position, but there did not appear to be any significant changes in the second sanctions review compared to the first."

The FSS is expected to reach a final conclusion at the third sanctions review next month, after comprehensively considering the court’s ruling and additional opinions from financial institutions.

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