FSS Moves to Block a ‘Second Hong Kong ELS’... “4 Trillion Won Fine by Law, No Reductions for Recurrence”

"Inspection of 'Second ELS' Risks in Products like ETFs and ELDs... Blocking Recurrence of Mis-selling"
Stronger Financial Penalties for IT Incidents Due to Basic Violations
Considering Mandatory Customer Risk Assessment for Variable Insurance

The Financial Supervisory Service (FSS) is launching a comprehensive inspection of high-risk financial products to prevent a recurrence of incomplete sales incidents similar to the "Hong Kong H Index (Hang Seng China Enterprises Index, HSCEI) ELS" case. In particular, the FSS warned that if penalty reductions had not been applied in the Hong Kong ELS case, fines could have reached up to 4 trillion won, and stated that in similar future cases, the highest level of sanctions without mitigation would be imposed.

Blocking a 'Second Hong Kong ELS'... Inspection of Incomplete Sales of High-Risk Products

Lee Chanjin, Chairman of the Financial Supervisory Service (center), is speaking at the "1st Consumer Risk Response Council" held on the 20th. Lee Sehoon, Senior Vice Chairman of the Financial Supervisory Service (left), and Kim Seongwook, Vice Chairman of Banking and Small Finance (right), are taking notes on the chairman's speech. Financial Supervisory Service

The FSS announced on the 22nd that Chairman Lee Chanjin held the "1st Consumer Risk Response Council" on the 20th. The meeting was attended by FSS executives and heads of key departments, who discussed major financial issues that could potentially cause consumer harm.

The main topics included: ▲ An increase in margin loans and so-called "bittoo" (borrowing to invest) at securities firms ▲ A surge in sales of equity-linked products such as exchange-traded funds (ETF), equity-linked deposits (ELD), and variable insurance ▲ The possibility of financial accidents and IT system errors ▲ The impact on consumers from the restructuring of insurance sales commissions ▲ Countermeasures against the misuse of virtual accounts for illegal purposes ▲ Ongoing monitoring of consumer risk factors and enhancement of financial education ▲ Disruptive activities in the capital market by YouTubers and social network service (SNS) influencers.

Chairman Lee stated, "We must move away from a system of consumer protection focused on ex-post remedies and instead proactively identify risk factors and respond more swiftly. In particular, a monitoring system must be established to promptly detect disruptive activities by certain YouTubers and influencers in the capital market."

The FSS emphasized the prevention of consumer harm and warned that, in the event of a recurrence of incomplete sales, fines would be imposed without any mitigation.

After the council, Senior Deputy Governor Lee Sehoon told reporters, "If another incomplete sales case like the Hong Kong ELS were to happen, we will impose fines at the full level prescribed by law, without considering any reductions." He added, "If fines amounting to several trillion won are imposed, this will directly affect banks' net profits and shareholder dividends, which, in turn, become a key factor in shareholder evaluations of management performance. In the case of banks, such financial sanctions could function as a mechanism for shareholders to exert control over management appointments."

The FSS considers equity-linked products such as ETFs, ELDs, and variable insurance, which have recently seen a surge in sales at banks, to be high-risk products with the potential to become a "second Hong Kong ELS." Unlisted stocks at private banking (PB) center flagship branches are also subject to inspection.

Senior Deputy Governor Lee said, "Banks have established much of the internal control systems related to ELS sales, but similar high-risk products are being sold in different forms. We plan to focus our inspections on whether incomplete sales or risks of consumer harm are recurring." He repeatedly stressed that if, as in previous cases, the possibility of loss is understated or products are sold without a proper understanding of their structure, strong sanctions will be imposed.

"Severe Financial Penalties for IT Incidents"

The FSS has also announced plans for strong sanctions in relation to recent electronic financial incidents. If incidents similar to the recent electronic financial accidents at Lotte Card, Coupang, Upbit, Bithumb, Naver Pay, KakaoBank, and Toss Bank, which have occurred continuously since the second half of last year, recur, the FSS intends to impose severe financial penalties on the institutions involved.

Senior Deputy Governor Lee noted, "The FSS is paying special attention to the fact that recent accidents have been concentrated not in traditional financial institutions such as banks and insurance companies, but in big tech (large information technology companies), virtual asset businesses, and internet-only banks. In the future, if accidents occur due to negligence in basic management obligations such as IT (security) investments, we will impose clear financial penalties, making it clear that increasing initial IT investment expenditures is more beneficial to long-term management than paying penalties."

He went on to say, "For example, if a problem occurs because sufficient testing was not conducted when implementing a new IT system, we will impose fines and penalties according to the Electronic Financial Transactions Act and the Credit Information Act. Normally, when multiple violations are combined, the maximum fine can be up to 10 times the statutory limit. If there is clear evidence of neglecting basic testing, we will minimize mitigating factors."

FSS Hints at Reviewing System to Mandate Assessment of Consumer Investment Propensity for Variable Insurance

Sehun Lee, Senior Deputy Governor of the Financial Supervisory Service. Photo by Chaeseok Moon

The FSS is also considering measures to strengthen consumer protection for variable insurance. In particular, the FSS plans to discuss with the Financial Services Commission and other relevant agencies the introduction of a system that would mandate the assessment of consumers' investment propensity during the sales process. The FSS will also strengthen guidance on important considerations at the time of subscription, including the structure of variable insurance products and fund management and operation, and will consider the need for inspections if sales surge. According to The Asia Business Daily, the volume of variable insurance sales at the three major commercial banks—KB Kookmin, Shinhan, and Woori—increased from 94.4 billion won in 2023 to 985.9 billion won last year, a tenfold surge in three years.

Senior Deputy Governor Lee stated, "Investment products with loss risks should only be recommended to appropriate consumers," adding, "Since there are multiple intertwined issues regarding system improvements, further review is necessary."

This content was produced with the assistance of AI translation services.