With the ordinance revision to set the basis for imposing penalty surcharges for banks' misselling of Hong Kong H-share index equity-linked securities (ELS) as the transaction amount (sales amount) being delayed, the sanction review has also been pushed back. Some in the financial sector say certain banks could face penalty surcharges in the trillion-won range.
According to the financial authorities and the banking sector on the 12th, the amendment to the regulations on penalty surcharges under the Financial Consumer Protection Act did not make it onto the agenda of the Financial Services Commission (FSC) regular meeting held on the 5th. Earlier, the FSC put up for public notice in September a draft amendment to an enforcement decree and supervisory regulations that clarifies the meaning of "revenue," the basis for penalty surcharges under the act, as "transaction amount." The public notice period ended on the 3rd, but the FSC extended it to the 17th of this month to adjust details.
The Financial Consumer Protection Act allows penalty surcharges of up to 50% of the "revenue" gained by a financial company through illegal acts or an equivalent amount. The financial authorities formed an internal task force (TF) in 2023 and discussed how to interpret revenue. The size of penalty surcharges varies greatly depending on whether revenue is defined as "sales amount" or "fees."
With the public notice period for the amendment extended, it is said to be difficult to put the Hong Kong ELS sanction item on the agenda of the Financial Supervisory Service Sanctions Review Committee (sanctions committee) to be held on the 20th of this month. To place an item on the sanctions committee agenda, prior notice and review procedures must be provided to the financial company three weeks in advance, but as of the 11th, the related procedures had not proceeded. The Financial Supervisory Service has said the sanctions committee agenda has not yet been finalized.
The Financial Supervisory Service is said not to be in a position to start sanction deliberations as it is about to carry out executive appointments. A financial authorities official said, "After the organizational reshuffle and appointments up to the Director General level are completed, we think the related work will begin in earnest."
Initially, the financial sector expected the sanctions committee to place the penalty surcharge agenda within this month and the final size of the penalty surcharges to be decided at the FSC regular meeting early next year. With the sanction process delayed, it appears the penalty surcharges will not be concluded until after March next year at the earliest.
The financial sector is focused on the size of the penalty surcharges. By bank, sales of Hong Kong ELS are the highest at KB Kookmin Bank with 8.1972 trillion won, followed by Shinhan Bank (2.3701 trillion won), NongHyup Bank (2.1310 trillion won), Hana Bank (2.1183 trillion won), SC Bank (1.2427 trillion won), and Woori Bank (41.3 billion won).
If penalty surcharges are imposed based on sales amount, KB Kookmin Bank could face up to 4 trillion won. However, if efforts to prevent and remedy consumer harm before and after the fact are recognized, they can be reduced by up to 75%. As banks have completed voluntary compensation for an average of 96% of investors, they expect the penalty surcharges to be greatly reduced.