Hong Kong ELS Sanctions Decision Postponed in September... All Eyes on Possible Further Fine Reductions

The Financial Services Commission Did Not Present Sanction Plans for Five Banks at the September 17 Subcommittee Meeting
Banks Secure Consecutive Civil Lawsuit Victories... Potential for Further Reduction in Fines
Banking Sector Considering Admi

The banking sector’s disciplinary actions relating to the incomplete sale of Hong Kong H-Index (Hang Seng China Enterprises Index · HSCEI) equity-linked securities (ELS) will not be finalized within this month. With recent civil court rulings increasingly siding with banks, there is speculation that fines could be reduced further. Banks have stated that if the sanctions are confirmed at their currently discussed levels, they will consider filing administrative lawsuits.

According to the financial industry on the 17th, the Financial Services Commission did not submit the Hong Kong ELS disciplinary plans for KB Kookmin, Shinhan, Hana, NH Nonghyup, and Standard Chartered Korea to the agenda subcommittee, which is convening today. As a result, the final decision regarding the level of sanctions is now unlikely to be made at the regular meeting at the end of this month. Typically, sanctions against financial companies are first discussed in the agenda subcommittee and then finalized at the regular meetings, which are held every two weeks.

A Financial Services Commission official said, "Normally, the agenda subcommittee is held every two weeks, but in exceptional cases like ELS, several ad hoc subcommittees have taken place. However, neither an ELS-related subcommittee nor an ad hoc meeting will be held this month."

Initially, the financial industry had speculated that the ELS disciplinary process, ongoing for over two years, would be concluded before the National Assembly’s annual audit next month, as the audit might raise questions regarding the delayed conclusions or appropriateness of sanction levels. However, as it has become virtually impossible to finalize the issue at the September regular meeting, it is now more likely that the final sanctions will be determined after the audit is over.

The ELS situation emerged as products that were sold in bulk by banks in 2021—when the Hong Kong H-Index was near its peak—matured in 2024. The index plummeted due to combined effects of regulatory crackdowns on Chinese big-tech companies and a slump in the real estate market. As the products matured before the index sufficiently recovered, significant losses were incurred. The banks later paid approximately 1.4 trillion won in voluntary compensation.

The size of the fine, which was initially discussed as being up to 2 trillion won, has been changed multiple times through discussions between the Financial Supervisory Service and the Financial Services Commission. In February, the Financial Supervisory Service proposed fines totaling about 1.4 trillion won for the five banks, but when the Financial Services Commission requested further review of the facts and legal principles, the Financial Supervisory Service revised the amount to about 600 billion won in June, reflecting the motives for violations and other factors.

Within the financial industry, it is believed the delay in the final decision is partly due to the intention to supplement the grounds for sanctions after the audit. Dealing with the ELS sanctions quickly, while other financial issues such as lending have taken center stage, may invite greater scrutiny, so waiting to see the criticism regarding delays and sanction levels during the audit before making a final decision is seen as a way to minimize the burden. It is also reported that the National Assembly’s Political Affairs Committee is currently more focused on leverage exchange-traded funds (ETFs) than on ELS.

A banking industry official familiar with the matter said, "It may be better to accept the critical remarks following the audit and reflect them to supplement the rationale before finalizing the decision, rather than pushing for a conclusion beforehand. The Financial Services Commission is considering multiple angles on whether to adopt the Financial Supervisory Service’s sanction plan as-is or to adjust it further."

There is also a possibility that the fines could be reduced further. This is because, given the recent civil court rulings in favor of banks regarding the incomplete sale of ELS products, the financial authorities may consider these judicial determinations in setting the final level of sanctions.

In January, a compensation lawsuit against KB Kookmin Bank for around 1 billion won was dismissed, and NH Nonghyup Bank also recently won an appellate case. The court found that, considering the plaintiffs’ financial background and investment experience, they could be expected to understand the risks of the products in question.

A high-level official at the Financial Services Commission stated, "As there have now been rulings in favor of financial institutions, we need to consider what degree of responsibility actually lies with them. References to how responsibility was apportioned in civil cases can be taken into account when imposing fines and penalties."

The banking sector maintains that if the fines are finalized at the approximately 600 billion won level, they will also consider administrative litigation. This is because, given the legal uncertainties, a lack of response could result in potential breach-of-duty issues in the future.

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