The financial authorities have yet to determine the level of sanctions against banks for the incomplete sale of Hong Kong H-index equity-linked securities (ELS), which occurred nearly a year ago, due to a lack of clarity on the criteria for imposing penalty surcharges. The financial authorities have decided to resume the suspended discussions on sanctions starting next month.
According to the financial sector on the 27th, the financial authorities will discuss the criteria for imposing penalty surcharges on banks involved in the incomplete sale of Hong Kong ELS starting in March. Under Article 57 of the Financial Consumer Protection Act, the Financial Services Commission can impose penalty surcharges on financial firms up to 50% of the 'income' obtained from contracts related to incomplete sales, but there are concerns about whether this income should be interpreted as the bank's ELS 'sales amount (investment principal)' or as the fees earned from ELS sales, leading to a suspension of the sanctions discussions. An official from the Financial Services Commission noted, "Interpretation of 'income' specified in the financial consumer protection law must be agreed upon by the Financial Services Commission, the Financial Supervisory Service, and the industry," adding, "We plan to resume the suspended discussions in March to clarify the criteria for imposing penalty surcharges."
The banking sector is on high alert, as the penalty surcharges could rise to trillions of won depending on the criteria applied. Since the introduction of the financial consumer protection law, the total value of Hong Kong ELS sold by banks is about 16 trillion won; thus, if half of the sales amount is imposed as a penalty surcharge, the charge would reach 8 trillion won. Assuming that the volume of incomplete sales is 30% of the total, the penalty surcharge would be around 2 trillion won. In contrast, the five major banks collected a total of 186.6 billion won in fees from selling Hong Kong ELS, which would set the penalty surcharge at a maximum of 100 billion won.
There is also a need to discuss how much the banks' efforts for voluntary compensation will be reflected in the penalty surcharges. Lee Bok-hyun, head of the Financial Supervisory Service, said last February that the financial authorities would consider measures to reduce penalty surcharges or sanctions for financial institutions that reach settlements or compensation with victims in line with the proposed compensation guidelines announced. He stated, "Compensating financially does not absolve wrongdoing entirely, but if substantial corrective action is taken and responsibility is acknowledged, providing appropriate restoration measures for consumers could certainly become a factor for reducing penalty surcharges." According to Article 46 of the enforcement regulations concerning the inspection and sanctions of financial institutions, 'sufficient compensation for the damages to financial traders and the efforts for damage recovery' should be considered during sanctions.
The financial authorities are in a position to expedite sanctions. A senior official from the Financial Services Commission said, "We are preparing a revision of the financial consumer protection law to increase penalty surcharge levels, targeting completion by September, while ensuring the sanctions for banks involved in the Hong Kong ELS incomplete sales are finalized beforehand." Previously, the Financial Supervisory Service sent an inspection opinion to the banks last April and initiated the formal sanction procedures, but progress has stalled. The financial authorities' sanction procedures involve the steps of 'sending inspection opinions → drafting sanction measures → holding a sanctions review committee → deciding on the sanction level → final notification of sanctions.'
Experts argue that sanctions need to be implemented swiftly. Lee Hyo-seop, head of the Financial Industry Division at the Capital Market Research Institute, stated, "The fact that the banks engaged in incomplete sales has been revealed, and the delay in sanction discussions is a problem," adding, "There must be strict administrative sanctions as well as institutional and personnel sanctions for incomplete sales separate from compensation for damages."