Korea’s financial regulator lowers sanctions on major banks over mis-selling of HSCEI-linked ELS

Korea’s financial regulator lowered the sanctions it plans to impose on major banks over the mis-selling of equity-linked securities (ELS) linked to the Hang Seng China Enterprises Index (HSCEI).

Members of a victims’ group related to the Hang Seng Index-linked equity-linked securities (ELS) fallout chant slogans at a news conference in front of the Financial Supervisory Service in Yeouido, western Seoul, on April 24, 2024, calling for the prosecution of financial institutions, executives and a former financial regulator chief, and demanding full compensation. [YONHAP]

Korea’s financial regulator lowered the sanctions it plans to impose on major banks over the mis-selling of equity-linked securities (ELS) linked to the Hang Seng China Enterprises Index (HSCEI), cutting proposed fines by up to 20 percent and easing disciplinary measures after reviewing the banks’ compensation efforts.

The Financial Supervisory Service (FSS) on Thursday revised the sanctions at its third sanctions review committee meeting, which involved KB Kookmin Bank, Shinhan Bank, Hana Bank, NH NongHyup Bank and Standard Chartered Korea.

The sanctions center on the banks' sale of high-risk ELS tied to the HSCEI to Korean retail investors. As the index fell sharply, many products matured at steep losses in 2024, and investors have accused banks of not sufficiently explaining the risks. The FSS had initially notified the banks in advance of fines totaling about 2 trillion won.

The regulator did not disclose the exact amount of fines on Thursday, but industry sources estimate the total now stands at around 1.4 trillion won ($968 million).

The FSS lowered the level of institutional sanctions by one notch, reducing them from a partial business suspension to a reprimand under its five-tier system that ranges from caution to license revocation. It also downgraded disciplinary measures for executives responsible for ELS sales.

“We adjusted the scope and level of sanctions after comprehensively taking into account the banks’ follow-up measures and efforts to prevent a recurrence," an FSS official said.

Banks have compensated more than 96 percent of investor losses linked to the products, according to industry officials.

Bank ATMs in Seoul are pictured on Jan. 23. [YONHAP]

Some banking industry insiders said the reduction was more limited than they had hoped. Revisions to the Act on the Protection of Financial Consumers in November of last year allow authorities to reduce fines by up to 50 percent if companies make meaningful post-incident compensation efforts and by up to 75 percent if they meet preventive requirements.

Some in the industry say the latest decision reflects the regulator’s firm stance on consumer protection, despite the partial relief. FSS Gov. Lee Chan-jin has described the episode as “a representative case of mis-selling” and has stressed the seriousness of the matter.

The final sanctions require approval by the Securities and Futures Commission under the Financial Services Commission (FSC) and by the FSC itself at its regular meeting.

“As this is not the final decision, we will faithfully present our case in the remaining procedures," a banking industry official said. “We will place our hopes on discussions at the Securities and Futures Commission.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom. BY KIM DA-YOUNG [kim.juyeon2@joongang.co.kr]