In relation to the large losses of Hong Kong H Index-linked securities (ELS) products, the legal deadline for imposing fines on financial institutions for incomplete sales will sequentially return from the end of this year. If this deadline is exceeded, the financial authorities will not be able to impose fines even if they impose sanctions.
Observations have emerged in the financial sector that the Lee Jae-myung government is in the process of reforming the financial supervisory system, making it difficult for the financial authorities to make significant policy decisions such as sanctions on Hong Kong ELS.
According to the financial sector on the 6th, it has been reported that the Financial Services Commission recently established 'investment principal' as the standard for calculating penalty surcharges under the Financial Consumer Protection Act.
Under the Financial Consumer Protection Act, the financial authorities can impose penalty surcharges of up to 50% of the 'income' obtained by financial institutions through illegal acts or equivalent amounts. The financial authorities formed an internal task force (TF) from 2023 to discuss how to interpret 'income'. The scale of the penalty surcharge varies depending on whether income is defined as 'investment principal' or 'commission'. The Financial Services Commission's recent interpretation is expected to apply to the calculation of penalty surcharges for Hong Kong ELS. Some predict that major commercial banks could face penalty surcharges of up to trillions of won.
The issue is that a year and five months have passed since the financial authorities announced the inspection results of Hong Kong ELS, yet they have not been able to initiate the sanction process. Last March, the financial authorities announced inspection results indicating that incomplete sales occurred at five banks selling Hong Kong ELS and six securities firms.
As of the end of 2024, the accounts with confirmed losses from Hong Kong ELS total about 170,000, with losses amounting to 4.6 trillion won out of a total principal of 10.4 trillion won. In the case of banks, incomplete sales have been found at around 10% to 40%.
As the sanction process is delayed, the exclusion period for fines due to incomplete sales is approaching. Fines cannot be imposed if five years have passed since the occurrence of the incomplete sale. Hong Kong ELS has been sold since the end of 2020 and was concentrated in sales during the peak year of the Hong Kong H Index in 2021. The exclusion period for fines for the Hong Kong ELS sold at the end of 2020 will begin at the end of this year. If this period crosses over into next year, the exclusion period for products that were concentrated in sales in 2021 will also return sequentially.
The financial authorities maintain that the delay in the clarification of penalty surcharge standards has also postponed the sanction process. However, in the financial sector, there are views that the vacancy in the leadership of the financial authorities and the delay in reforming the financial supervisory system have made it difficult to make decisions on large-scale sanctions like those for Hong Kong ELS.
In particular, the Financial Services Commission, which will make the final decision on sanctions against financial institutions, is at risk of being dismantled. The Presidential Committee on Policy Planning recently reported to the Presidential Office a reorganization plan that transfers the policy functions of the Financial Services Commission to the Ministry of Economy and Finance and integrates its supervisory functions with the FSS to form a 'Financial Supervision Committee.' If the Financial Services Commission is dissolved, relevant laws such as the Financial Services Commission Establishment Act, the Government Organization Act, and the Banking Act will need to be amended comprehensively. If the reform of the financial supervisory system is prolonged, the progress of the sanctions process for Hong Kong ELS will also become unclear.
Opinions have also been raised that additional interpretation procedures regarding penalty surcharges under the Financial Consumer Protection Act are necessary. Financial institutions still argue that 'income' under the Financial Consumer Protection Act should be viewed as commission revenue rather than investment principal. Furthermore, the scope and standards for reducing penalty surcharges for financial institutions that take proactive compensation must also be clarified.
A person related to the financial sector stated, 'Intense debates are expected in the sanction review process over the interpretation of penalty surcharges,' adding, 'It will not be easy to finalize the final sanction results within the year.'