Financial Services Commission Requests Reexamination of 'Hong Kong ELS Sanctions Plan' from Financial Supervisory Service ... First Time in 8 Years Since Samsung Biologics Case

FSC Requests Supplementation of Certain Facts and Legal Principles

On May 13, the Financial Services Commission (FSC) requested the Financial Supervisory Service (FSS) to reconsider its decision regarding the misselling of Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS). This marks the first time in eight years that the FSC has effectively asked the FSS to review a major sanction, the last instance being the request for a re-audit in 2018 concerning Samsung Biologics' accounting standards violations.

According to the FSC on the 13th, the agenda on the misselling of Hong Kong H Index ELS was submitted to its regular meeting that day, after which the FSC requested the FSS to reconsider the case.

The FSC stated, “Based on the discussions of the subcommittee reviewing the agenda on the actions regarding the inspection results of banks and securities firms involved in the misselling of Hong Kong H Index ELS, we have asked the FSS to supplement certain facts and the application of relevant laws and legal principles.”

This effectively means that the FSC has determined it is difficult to fully accept the FSS’s sanctions proposal as it stands. In February, the FSC had received the FSS’s resolution for sanctions against the banking sector. At that time, the FSS, through its sanctions committee, decided on a total fine of 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 decision by the sanctions committee does not have legal force, the final level of sanction is determined by the FSC.

The background to the FSC’s request for reconsideration after more than three months of delay appears to be disagreements over the original sanction proposal. Within the FSC, there has been a perception that the scale of penalties calculated by the FSS is excessive.

In particular, the FSC reportedly took issue with the fact that, after the FSS imposed fines totaling 1.4 trillion won, it subsequently mentioned the need for further reductions in discussions with the FSC. The FSS maintains that it initially considered a penalty of 1.9 trillion won but lowered it to 1.4 trillion won to reflect voluntary compensation by the banking sector, and that it lacked the authority to further reduce the penalty through discretionary mitigation.

Furthermore, the FSC faced a dilemma between its commitment to consumer protection and the policy of expanding productive finance in relation to this case. If the fines were finalized as originally proposed by the FSS, the capital strength of the banking sector could be weakened, potentially undermining the momentum for the productive finance policies advocated by the Lee Jaemyung administration. On the other hand, since the Hong Kong ELS misselling incident is the first major case since the implementation of the Financial Consumer Protection Act in 2021, there were concerns that setting the fines too low could send the wrong signal to the market.

Recent trends of financial authorities repeatedly losing administrative lawsuits against financial companies also appear to have influenced the FSC’s decision to request a review.

An FSC official stated, “Once the proposal is supplemented, we will review it swiftly and thoroughly before making a decision.”