When Will a Conclusion Be Reached on the Hong Kong ELS Penalty Surcharge? "We Won't Rule Out Litigation; Concerns Are Mounting"

[Financial News] The Financial Services Commission (FSC) is delaying its final decision on sanctions related to the mis-selling of Hong Kong H Index (Hang Seng China Enterprises Index) equity-linked securities (ELS), estimated to involve 600 billion won. It considers the penalty surcharge excessive because some banks have paid "compensation" to victims. The FSC has begun an in-depth review to establish the legal justification for the surcharge and prevent further losses in court.
According to data the FSC submitted on the 30th to the office of Park Sung-hoon, a People Power Party lawmaker on the National Assembly Political Affairs Committee, there were 242 lawsuits related to FSC administrative dispositions, including penalty surcharges, from 2022 through this year. The total amount in dispute was 19.3817 billion won. Of the cases that received final rulings, the FSC won 96 and lost 79. The amount lost was 6.8834 billion won, or approximately 35.5% of the total amount in dispute. Of the 13 cases concluded this year, the FSC won seven and lost six. The amount lost, 1.25 billion won, was more than twice the amount won, 531.1 million won.
As more of the FSC's administrative dispositions have been overturned in court, concerns have also been raised about declining confidence in the authorities' oversight and reduced predictability for the financial industry. Some officials internally have argued that the authorities are at a disadvantage in terms of legal support compared with financial companies. 
An FSC official said, "The FSC has several lawyers and professors who provide advice, but the opposing side is represented by top-tier large law firms." The official added, "Under the principle prohibiting dual representation, the law firms advising financial companies cannot advise the authorities, so we have to use mid-tier firms instead of those top-tier firms."
As the FSC continues to lose lawsuits, the finalization of sanctions against banks for mis-selling H Index ELS products has been delayed. The sanctions proposals for KB Kookmin Bank, Shinhan Bank, Hana Bank, Nonghyup Bank and Standard Chartered Bank Korea were not placed on the agenda of the FSC's regular meeting on the 23rd.
The sanctions have yet to be finalized, more than two and a half years after on-site inspections began in January 2024. After rejecting the 1.4 trillion won penalty surcharge proposal submitted by the Financial Supervisory Service in May, the FSC received a revised proposal in which the Financial Supervisory Service reduced the amount to less than half, or around 600 billion won. FSC commissioners are currently holding meetings every other week in an informal discussion format to determine the final surcharge amount.
Some banks, including Nonghyup Bank, have continued to win civil lawsuits related to the mis-selling of Hong Kong H Index ELS products. The banking industry has protested that imposing penalty surcharges after it had already provided large-scale voluntary compensation would amount to double punishment. There have also been suggestions that the banks could file a lawsuit over breach of trust if the 600 billion won surcharge is finalized.
An FSC official said, "We are reviewing relevant court precedents and discussing whether to maintain the original penalty surcharge proposal or reduce it further." The official added, "This is not an era in which sanctions are the answer to everything, but we are seeking a solution."
The sanctions pose a burden for the authorities because they would constitute the first large-scale penalty surcharge case since the enactment of the Act on the Protection of Financial Consumers in 2021. They could also set a precedent for future sanctions related to mis-selling. If the surcharge is reduced substantially, the authorities could face criticism for imposing slap-on-the-wrist punishment.
[email protected] Park Moon-soo Reporter