HSCEI-linked ELS sellers to compensate losses up to 100%

FSS Governor Lee Bok-hyun. [Photo by Yonhap]

With losses from equity-linked securities (ELS) tied to Hong Kong‘s Hang Seng China Enterprises Index (HSCEI) expected to hit 5.8 trillion won ($4.4 billion) by the end of 2024, sellers of these ELS products will have to compensate investors up to a maximum of 100 percent.

The Financial Supervisory Service (FSS), South Korea’s financial watchdog, unveiled guidelines on Monday for compensating investors in HSCEI-linked ELS products for their losses. Sellers will autonomously negotiate with investors based on the FSS guidelines, and the FSS will intervene as a mediator if an agreement cannot be reached. Legal action could follow if mediation fails.

The seller’s responsibility as well as individual investor issues are taken into account when determining the compensation ratio. Seller responsibility, which is primarily assessed based on compliance with the obligation to provide sufficient product education, accounts for 23 to 50 percent. An additional 45 percentage points are adjusted based on the investor‘s investment objective, prior ELS experience, and purchase and profit size. Special investor circumstances may result in a 10-percentage-point adjustment, but the guidelines do not set a floor or ceiling on compensation ratios and tailor compensation to individual investor situations.

“We aim to ensure investors affected by unfair sales are appropriately compensated, without undermining investor responsibility,” FSS Governor Lee Bok-hyun said.

According to Lee Se-hoon, first senior deputy governor of the FSS, the compensation rate in many cases will be between 20 and 60 percent. Compared to previous scandals involving high-risk derivatives-linked funds, the accountability of the sellers in this case is lower because ELS products are sold on a subscription basis with a broader target customer base compared to DLF products, whose structure is difficult for customers to understand. There are also safeguards in the financial consumer protection law as of March 2021 that ensure that financial institutions provide explanations about the products they sell.

Financial authorities are reportedly exploring measures to prevent large-scale losses from high-risk financial products, such as banning banks from selling them or restricting sales to specialized asset management channels.

Banks and securities firms have sold over 395,000 HSCEI-linked ELS products since January 2021, with losses from products maturing in January and February 2024 totaling 1.2 trillion won.