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 announcement of disciplinary measures for banks related to the incomplete sales of equity-linked securities (ELS) tied to the Hong Kong H-Index (Hang Seng China Enterprises Index·HSCEI) will not be finalized within this month. With local courts recently ruling in favor of banks in a series of civil lawsuits, there is also talk that fines could be further reduced. The banking sector maintains that, if the level of sanctions currently under discussion is finalized, it plans to consider administrative litigation in response.

According to the financial sector on September 17, the Financial Services Commission (FSC) did not include the disciplinary proposals related to Hong Kong ELS for KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea, in the agenda subcommittee convened on the same day. As a result, the likelihood of a final decision on disciplinary levels being made at the regular meeting at the end of this month has also diminished. Generally, disciplinary measures for financial companies are reviewed in the agenda subcommittee before a final decision is made at the regular meeting held every two weeks.

An FSC official stated, "Normally, the agenda subcommittee convenes every two weeks, but in special situations like ELS, ad hoc subcommittees have been held multiple times," adding, "However, this month, there will be neither an ELS-related agenda subcommittee nor any ad hoc subcommittees."

Initially, there had been speculation that the disciplinary procedures regarding ELS, ongoing for more than two years, would be wrapped up before the upcoming National Assembly audit scheduled for next month. This is because questions could arise at the audit regarding the reasons for the delay or the appropriateness of the level of sanctions. However, with the regular meeting review in September now deemed virtually unfeasible, it has become increasingly likely that a final decision on the sanctions will be postponed until after the audit.

The ELS issue surfaced in earnest in 2024 as products heavily sold by banks in 2021, when the Hong Kong H-Index was approaching its peak, reached maturity. A combination of China's big tech regulations and a slump in the real estate market led to a sharp drop in the Hong Kong H-Index. Substantial losses occurred as many contracts matured before the index had sufficiently rebounded. Since then, the banks have voluntarily compensated investors, reportedly paying out approximately 1.4 trillion won.

The proposed fine, which was initially discussed as possibly reaching as high as 2 trillion won, has been adjusted downward several times through discussions between the Financial Supervisory Service (FSS) and the FSC. In February, the FSS recommended to the FSC a fine of about 1.4 trillion won on the five banks. When the FSC requested further review on the facts and legal matters, the FSS took into account motives for violations and lowered the fine proposal to about 600 billion won as of June.

The financial industry believes that the delay in a final decision may also be due to an intention to supplement the rationale for the sanctions after the National Assembly audit. Since there are currently other pressing financial issues, such as lending, it is considered less risky to observe reactions and criticisms about the potential delay or the sanction level during the audit process before concluding the matter. Reportedly, the National Assembly’s Committee on Political Affairs is currently more focused on leveraged exchange-traded funds (ETFs) than on ELS.

An official from the financial sector familiar with the matter said, "It may be better to accept and reflect on the criticisms raised after the audit before making a decision, rather than forcing a conclusion ahead of the audit," adding, "Within the FSC, there is ongoing review from various angles on whether to process the FSS's sanction proposal as-is, or make further adjustments."

There is also a possibility that the fine will be further reduced. Recent civil lawsuits regarding the incomplete sale of ELS have resulted in a series of bank-friendly verdicts, which the financial authorities may reference when defining the level of sanctions.

In January, a damages suit worth over 1 billion won against KB Kookmin Bank was dismissed, and NH Nonghyup Bank recently won in the appeals process. In these cases, the courts judged that investors possessed sufficient financial background and experience to have understood the risks involved.

A senior FSC official stated, "Since verdicts have been reached in favor of financial institutions, it is now necessary to objectively assess the extent of their responsibility," adding, "How responsibility was judged in civil court can be considered in determining the imposition of fines and administrative penalties."

The banking industry maintains that if the fine is finalized at around 600 billion won, it will consider administrative legal action. This is because, given room for legal dispute, failure to actively respond may raise future issues of breach of fiduciary duty.

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