ELS and Governance Reform Stalled for Over Half a Year to Be Resolved in September

Final Stage of Ruling Party-Government Discussions on Governance Reform Plan
Sanctions on ELS Aimed for Resolution This Month; Sector Watches for Further Reductions
Unexpected Issues and Coordination with Presidential Office Cause Delays
Authorities Accelerate Ahead of October National Assembly Audit

Financial authorities are set to finalize both the sanctions on Hong Kong H Index (Hang Seng China Enterprises Index, HSCEI) equity-linked securities (ELS) and the improvements to financial holding company governance structures within September, after more than half a year of delays. The prolonged coordination with the presidential office due to the sensitive nature of these issues, coupled with ongoing matters such as real estate loan regulations, increased market volatility following the Middle East war, and controversy over leveraged exchange-traded funds (ETFs), resulted in repeated postponements. With the National Assembly’s annual audit scheduled for next month, the authorities are now aiming to accelerate the resolution of remaining pending issues.

According to financial authorities on September 2, the Financial Services Commission (FSC) is in the final stage of discussions with the ruling party and government on the plan to improve the governance of financial companies.

The timing of the announcement for the governance reform plan has already changed several times. The FSC had initially notified its schedule, aiming for disclosure before the regular shareholder meetings of financial holding companies in March. However, this was suddenly canceled. Afterwards, Lee Chanjin, the Governor of the Financial Supervisory Service (FSS), proposed April and then early July as possible announcement dates, but neither timetable was met.

The core of the reform focuses on curbing the long-term extension of financial holding company chairmen's tenures. Following President Lee Jaemyung’s direct criticism of a “corrupt inner circle” during the FSC’s work briefing in December last year, the FSC drafted measures to strengthen the requirements for shareholder approval when extending the term of a holding company’s CEO. However, as the presidential office emphasized the legal prohibition of more than three consecutive terms, the discussion dragged on. Recently, as the National Assembly expressed opposition to this provision, it is widely believed it will likely be excluded from the final draft.

A financial authority official stated, “Various proposals are under discussion between the ruling party and the government,” adding, “The announcement will be made soon after the discussions are concluded.”

The sanctions related to the Hong Kong H Index ELS have also become a prolonged matter. At the end of February, the FSS voted on a sanction proposal that included imposing a 1.4 trillion won penalty on banks for misselling these products and forwarded it to the FSC. However, the FSC requested revisions in May. The FSS resubmitted a proposal in June with the penalty reduced to approximately 600 billion won, but the FSC has not reached a conclusion for nearly three months. The FSC plans to finalize the sanctions this month after an additional review by a subcommittee. The financial sector anticipates that further reductions in penalties are possible.

One financial authority official commented, “There is ongoing consideration regarding the extent to which financial companies should bear responsibility for losses caused by heightened global volatility.” On the possibility of further penalty reductions, the official said, “It is difficult to make a judgment at this stage.”

The disruption of the financial authorities’ schedule was largely due to a series of unexpected issues. Subsequent real estate finance policies addressing restrictions for multiple homeowners and the “loan open run” phenomenon, the outbreak of the Middle East war, leveraged ETF controversies, and the market downturn all demanded attention and pushed other tasks down the priority list. Both the ELS sanctions and the governance reform plan are sensitive matters, and the presidential office’s increasingly rigorous oversight of key financial policies has further contributed to delays.

In the meantime, other challenges have accumulated. In the case of the Digital Asset Basic Act, the government initially aimed to submit it to the National Assembly last year, but prolonged coordination over contentious issues such as the won-denominated stablecoin delayed the schedule first to the first quarter of this year, then to September. Legislation is also urgent for the People’s Finance Stability Fund, as the legal grounds for financial companies’ contributions expire next month. Regarding the FSS special judicial police for civil financial crimes, the FSC and the Ministry of Justice recently agreed to expand the targets of investigation to include not only lending businesses but also debt collection companies. However, legislative changes by the National Assembly are still required for the system to launch within this year.

A financial sector official commented, “With recent supplementary measures announced on loan regulations and some calming around leveraged ETF controversies, the pace of addressing these issues should pick up. Ahead of the October parliamentary audit, it is time for financial authorities to show tangible results on longstanding unresolved issues.”

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