Lee Chan-jin, head of the Financial Supervisory Service, publicly mentioned the incomplete sales of equity-linked securities (ELS) during his first meeting with domestic bank presidents, causing tension in the banking sector. This is because the financial authorities may impose a penalty surcharge of up to 8 trillion won on the banking sector related to the Hong Kong H index ELS.
During a meeting with the heads of 20 domestic banks on the 28th of last month, Lee noted, "I will prioritize consumer protection in all tasks related to financial supervision and inspection," adding, "There should no longer be large-scale consumer rights violations such as incomplete ELS sales."
As Lee mentioned the incomplete sales of ELS as an example to emphasize consumer protection, it is expected that the sanctions process for the Hong Kong H index ELS will accelerate. The financial authorities' sanctions will be carried out in the order of sending the inspection report from the Financial Supervisory Service, notifying the proposed sanctions, holding a sanctions review committee, and making a final decision by the Financial Services Commission. The Financial Supervisory Service sent the inspection report last April, but over a year later, no proposed sanctions have been drafted. This is due to ambiguity regarding how to determine the criteria for the penalty surcharge.
According to the Financial Consumer Protection Act, the financial authorities can impose a penalty surcharge of up to 50% of the revenue obtained from contracts related to incomplete sales or equivalent amounts. The problem lies in how to assess the 'revenue' obtained from the contract. It is unclear whether the profits (commissions) earned by the bank from selling ELS or the amount from ELS sales (investment principal) should be the basis. For the top five banks, the commission for the Hong Kong H index ELS is 180 billion won, while the sales amount reaches 16 trillion won.
If the sales amount is used as the criterion, theoretically, the penalty surcharge could reach up to 8 trillion won. Looking at the sales amounts of each bank for the Hong Kong H index ELS, KB Kookmin Bank has the highest at 8.1972 trillion won. Additionally, Shinhan Bank has 2.3701 trillion won, NH NongHyup Bank has 2.1310 trillion won, Hana Bank has 2.1183 trillion won, and Woori Bank has around 413 billion won. The penalty surcharge for Kookmin Bank, which has the largest sales amount, could be around 4 trillion won. The remaining Shinhan, NongHyup, and Hana banks would each have to bear around 1 trillion won.
Considering that the banking sector proactively conducted voluntary compensation for the loss accounts related to the Hong Kong H index ELS, the actual penalty surcharge may be lower than 8 trillion won. As of the end of 2024, there are 170,000 loss accounts in the banking sector for the Hong Kong H index ELS, with a principal amount totaling 10.4 trillion won. The banking sector has proceeded with voluntary compensation for 159,000 accounts, compensating 1.3 trillion won out of a total loss of 4.1 trillion won.
The banking sector is raising concerns about potential issues with the penalty surcharge. They argue that imposing sanctions while not all 170,000 loss accounts have been definitively established as cases of incomplete sales is contradictory. Under current law, a penalty surcharge can be imposed in cases of violations of duties of explanation, unfair business practices, undue solicitations, or other compliance violations. Among the most contentious issues, a 'distorted explanation' providing definitive judgments on uncertain matters is not subject to penalty surcharge.
A representative of the banking sector said, "Voluntary compensation was conducted based on separate criteria from incomplete sales, so conducting voluntary compensation does not automatically mean that incomplete sales are recognized." He added, "If the penalty surcharge is determined according to the sales amount even though voluntary compensation was made, the banks would have a point of injustice." He further noted, "Since the financial authorities mentioned they would consider voluntary compensation and other factors in calculating the penalty surcharge, we are waiting for the results."