FSS Receives Hong Kong ELS Sanctions Plan... All Eyes on Penalty Reduction Scope

Supplementary Facts and Legal Review to Be Submitted to the FSC as Early as the End of This Month

The Financial Supervisory Service (FSS), which was asked by the Financial Services Commission (FSC) to review again the sanctions plan related to the incomplete sales of equity-linked securities (ELS) tied to the Hong Kong H-Index (Hang Seng China Enterprises Index, HSCEI) by banks and others, is expected to complete its review process by the end of this month at the earliest. While the FSS expects only a limited adjustment to the penalty amount, both inside and outside financial authorities, close attention is being paid to the scope of potential revisions to the original sanction plan.

According to financial authorities on May 13, the FSS has begun re-examining the facts regarding the Hong Kong ELS sanctions plan.

An FSS official stated, "Penalty adjustments may be made in the process of supplementing certain factual matters," adding, "However, the scope of adjustment is not expected to be significant." The official continued, "If there are new measures, a separate sanctions committee may be convened," and added, "The final penalty amount will be decided at the regular meeting of the FSC."

According to financial authorities, in the course of this review of the Hong Kong ELS sanctions plan, adjustments need to be made to align the disciplinary standards for banks and securities firms regarding insufficient explanation of risk grades. For example, in the case of banks, there were instances of misclassifying or misapplying risk grades, while for securities firms, the issue was a breach of the duty to explain. The FSS reportedly assessed both under similar criteria, so a technical adjustment to "level the standard" is said to be necessary.

Within the financial sector and beyond, some analyze that this factual supplementation request to the FSS is a preemptive step by the FSC toward reducing the penalty amounts.

Earlier on the same day, the FSC asked the FSS to review again its proposed actions based on inspections of banks and securities firms regarding incomplete sales of Hong Kong ELS. The FSC explained, "We requested the FSS to supplement certain factual matters and applicable laws and legal principles." Effectively, this means the FSC judged it difficult to accept the FSS’s original sanctions plan as it is.

This is the first time in eight years that the FSC has effectively requested the FSS to review a major sanction case—the last being the re-examination request in 2018 regarding Samsung Biologics' violation of accounting standards.

In February, the FSC received the sanction proposal for the banking sector from the FSS. At that time, the FSS, through its sanctions committee, decided on a total penalty of 1.4 trillion won and institutional warnings for five banks: KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and SC First Bank. However, the decision of the sanctions committee does not have legal force, and the final sanction level depends on the FSC’s judgment.

The reason the FSC delayed its decision for over three months and requested a review from the FSS appears to be due to concerns over the original sanctions plan.

Within and outside the financial authorities, there were significant concerns that if the FSS’s original plan for financial penalties was finalized, it would weaken the capital adequacy of banks, undermining the momentum for the productive financial policy initiatives being promoted by the Lee Jaemyung administration. On the other hand, as this Hong Kong ELS mis-selling case is the first major instance since the implementation of the Financial Consumer Protection Act in 2021, there were considerable concerns that excessively lowering the penalties could send the wrong signal to the market.

In addition, there were internal views within the FSC that the initial penalty amount calculated by the FSS was excessive. In a situation where the principles of productive finance and consumer protection are in conflict, the FSC’s room to maneuver was limited.

In particular, after the FSS imposed penalties of about 1.4 trillion won, it reportedly raised the need for further reduction during discussions with the FSC, which the FSC viewed as problematic. However, the FSS stated that it had already reduced the original amount from about 1.9 trillion won to 1.4 trillion won, factoring in voluntary compensation by banks, and noted that, as it does not have the authority to further reduce penalties at its discretion, additional reductions are difficult.

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

An FSC official stated, "As soon as the proposed measures are supplemented, we will quickly and thoroughly review them and proceed with the disposition."