[Financial Microscope] Financial Authorities Caught in Dilemma as 'Hong Kong ELS' Fine Remains Undecided for Two Months

The financial authorities have been deliberating for more than two months on the amount of fines to be imposed on banks in connection with the incomplete sale of equity-linked securities (ELS) tied to the Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI). While sanctions are necessary to send a "consumer protection" message, the dilemma lies in the fact that a fine of 1.4 trillion won could increase the capital burden on banks and shrink the supply of productive finance.

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According to financial authorities on April 15, the Financial Services Commission (FSC) has decided not to include the agenda on sanctions against banks related to the incomplete sale of Hong Kong ELS in the regular FSC meeting scheduled for later today.

A financial authority official stated, "If we significantly reduce the fine from 1.4 trillion won, it could be criticized as a 'slap on the wrist,' while imposing strong sanctions could be seen as excessive pressure based on 'political judgment.' No matter what decision is made, it will be difficult to avoid criticism regarding the severity of the sanctions, so there is a great deal of consideration regarding the final plan." The official added, "We need more time to make a decision, as we must comprehensively consider various factors, including the banks' voluntary compensation efforts, the potential for future administrative lawsuits, and trends in legal precedents."

On February 12, the FSC received a sanction resolution proposal for the banking sector from the Financial Supervisory Service (FSS). Through the sanction review committee, the FSS decided on fines totaling 1.4 trillion won and institutional warnings for five banks: KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea. However, since the sanction review committee is an advisory body to the FSS governor and does not have legal authority, the final decision on the level of sanctions remains with the FSC. According to the revised Financial Consumer Protection Act, the FSC can reduce fines by up to 75% to reflect efforts to provide relief to victims.

The reason the FSC has been unable to reach a decision for two months lies in the conflict between the principles of consumer protection and the policy of expanding productive finance. The current administration has repeatedly emphasized the role of banks in expanding corporate finance and acting as intermediaries for real-sector capital. The five major financial groups have announced plans to inject more than 500 trillion won into productive finance over the next five years. However, if a large-scale fine is imposed, concerns have been raised that the banks' capital capacity will be reduced, potentially undermining this policy direction.

Additional considerations include the fact that voluntary compensation, the principle of investor self-responsibility, and the banks' unjust profits-which are estimated to be around 100 billion won-are low compared to the fine of 1.4 trillion won.

On the other hand, if the fine is significantly reduced, it would be difficult to avoid criticism of neglecting consumer protection. The incomplete sale of Hong Kong ELS is the first major case since the implementation of the Financial Consumer Protection Act in 2021 and is a symbolic test case determining the scope of responsibility and standards for sanctions on financial companies. If the fine is set too low, there is concern that the authorities may send the wrong signal to the market. Although the banking sector has completed voluntary compensation totaling 1.3 trillion won for more than 90% of victims in accordance with the dispute mediation plan, there is ongoing debate about whether voluntary compensation alone is sufficient to substitute for legal responsibility.

As a result, the financial authorities have been unable to reach a conclusion regarding the appropriate level of fine reduction. There are even signs within the FSC that the amount proposed by the FSS is excessive. However, the FSS maintains that it initially considered a fine of 1.9 trillion won and lowered it to 1.4 trillion won in consideration of voluntary compensation, and that in principle, fines could have reached up to 4 trillion won. The FSS also consistently explains that it has no authority for discretionary reduction, while the FSC, which has discretionary reduction authority without separate restrictions, must exercise significant political judgment in this situation.

Both inside and outside the financial authorities, there is speculation that the final decision could be postponed until May. Another regular FSC meeting is scheduled for April 29.

A financial sector official said, "It will not be easy for the FSC to impose fines in the trillion-won range," adding, "Given the banks' voluntary compensation efforts and the emphasis on productive finance, there is a high possibility that the final amount will be significantly lower than what the FSS originally proposed."

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