The financial authorities are expected to finalize this month the size of the penalty surcharge for incomplete sales of Hong Kong H-share index-linked securities (ELS) by the banking sector. The penalty surcharge, initially projected to approach 2 trillion won, was reduced to the 600 billion won range through a reconsideration process, and banks are also hoping for additional reductions.
According to the financial authorities on the 20th, the Financial Services Commission will make a final decision on the sanctions plan for Hong Kong ELS at a regular meeting on the 29th. Before the regular meeting, the Financial Services Commission (FSC) will convene its agenda subcommittee this week to discuss whether to finalize 600 billion won in penalty surcharge, set by the Financial Supervisory Service's temporary sanctions review committee, as the final level of sanctions. Earlier, on the 14th, the FSC heard the banking sector's views through the agenda subcommittee.
The banking sector is said to have proposed applying the guidance period under the Financial Consumer Protection Act (FCPA) at the subcommittee. Under the FCPA, the penalty surcharge is imposed in proportion to the amount sold, but the first six months after the law took effect were a "guidance period," focusing on guidance rather than sanctions, so the view is that sales during this period should be excluded from sanctions. The period when banks sold Hong Kong ELS largely overlapped with this guidance period.
If the motive for violating the FCPA is intent or gross negligence, the guidance period does not apply. If the financial authorities lower the banking sector's FCPA violation motive from "gross negligence" to "ordinary negligence" at this subcommittee, it creates legal grounds to exclude sales during that period. If sales during the guidance period are removed, the reduction is expected to be largest for KB Kookmin Bank, where sales were concentrated.
In February, the Financial Supervisory Service imposed a 1.4 trillion won penalty surcharge, but at the subsequent sanctions review, the amount was drastically reduced to around 600 billion won as the criteria for determining illegality were lowered and voluntary compensation efforts were reflected. In addition, the Financial Services Commission (FSC) last month sent the sanctions plan back to the Financial Supervisory Service (FSS), citing the need to supplement the applicable statutes and legal reasoning. It is highly unusual to return a sanctions plan to the FSS.
Within the Financial Services Commission (FSC), it was reportedly a prevailing view that even the 600 billion won penalty surcharge set by the Financial Supervisory Service (FSS) remained excessive. Moreover, considering the increase in administrative lawsuits challenging the authorities' sanctions, the government's policy to expand productive finance, and banks' capital capacity, there is speculation that further reductions could be made at the subcommittee. An FSC official said, "ELS is a matter we have discussed multiple times, so while further reductions remain uncertain, we will reach a conclusion this month."