‘Hong Kong ELS Scandal’: 370 Billion Won in Fines Finalized... Banks ‘Relieved’ vs. ‘Lawsuits Still Possible’

[Financial News] Financial authorities have finalized fines and administrative penalties totaling 374.632 billion won against seven commercial banks and six securities firms over alleged mis-selling of equity-linked securities (ELS) tied to the Hong Kong H Index (Hang Seng China Enterprises Index), which had drawn criticism over ‘rubber-band fines.’ The total is about one-tenth of the initial fine estimate of 4 trillion won, but is the largest monetary sanction ever imposed by the Financial Services Commission.
On the 4th, the Financial Services Commission held its 19th regular meeting at Government Complex Seoul and finalized fines totaling 361.96 billion won and administrative penalties of 1.778 billion won against seven banks—KB Kookmin, Shinhan, Hana, NongHyup, SC, Woori and Suhyup—for violating the Act on the Protection of Financial Consumers in connection with the mis-selling of ELS tied to the Hong Kong H Index. It also approved fines totaling 9.282 billion won and administrative penalties of 1.612 billion won against six securities firms—Mirae Asset, KB, Shinhan, NH, Korea Investment and Samsung Securities.
The amount of the fines over Hong Kong ELS was repeatedly reconsidered for about two years. After an on-site inspection by the Financial Supervisory Service in early 2024, the process went from an initial estimate in the 4-trillion-won range to prior notice of an amount in the 2-trillion-won range (last November), then approval by the sanctions review committee of an amount in the 1.4-trillion-won range (this May), a report recommending a reduction to 600 billion won (June), and finally confirmation of an amount in the 370-billion-won range. This is why critics say the standards were a ‘rubber band.’
The fines and administrative penalties by bank were: KB Kookmin Bank, 172.334 billion won (administrative penalty of 1.3 billion won); Hana Bank, 92.475 billion won; NH NongHyup Bank, 40.175 billion won (administrative penalty of 420 million won); Shinhan Bank, 38.745 billion won; SC First Bank, 17.9 billion won (administrative penalty of 16 million won); and Woori Bank, 331 million won. Suhyup Bank received only an administrative penalty of 42 million won. Among the securities firms, Korea Investment & Securities received the largest penalty, with a fine of 9.245 billion won and an administrative penalty of 12 million won. Samsung Securities was assessed an administrative penalty of 1 billion won, while KB Securities was assessed 300 million won.

From 2021 to 2023, these banks and securities firms violated their duty to explain products, including by inducing customers to mistake Hong Kong H Index-linked ELS products for ‘principal-guaranteed deposits’ and by failing to disclose risks. The Hong Kong H Index subsequently plunged at least 50% from its peak, resulting in large-scale losses of principal. Losses amounted to trillions of won. A high proportion of investors were older people aged 60 and above who had invested to renew their bank deposits and installment savings, and many victims lost retirement and post-retirement funds.

The banks targeted by the sanctions appear to be breathing a sigh of relief, saying they ‘avoided the worst.’ With the size of the sanctions finalized, financial uncertainty has declined, and a substantial portion of the amounts set aside as provisions can now be recognized as profit. In the second quarter of this year, Shinhan Bank and SC First Bank had already reversed ELS fine-related provisions of 83.7 billion won and 110.2 billion won, respectively, into accounting profit. Analysts expect KB Financial, which is among the entities targeted by the sanctions, to reverse about 190 billion won in provisions in the fourth quarter.
The Financial Services Commission said it ‘proceeded with several rounds of deliberations and took care to act prudently, given that this was the first large-scale fine imposed since the Act on the Protection of Financial Consumers took effect.’ It also took into account that five banks—Kookmin, Shinhan, Hana, NongHyup and SC First—had paid victims a total of 1.3437 trillion won in voluntary compensation, an amount greater than the scale of their unjust gains. It also appears to have considered the repeated cases in lawsuits over Hong Kong ELS losses in which courts declined to recognize banks’ liability for compensation, citing individual investors’ past investment experience and investment profiles.
It remains unclear whether the final sanctions will bring the legal disputes to an end, as banks may still challenge them in administrative lawsuits. An official at a commercial bank said, ‘Whether to file a lawsuit could depend not only on the size of the fine but also on how much of the arguments raised by the banks were accepted,’ adding, ‘Nothing has been specifically decided yet.’
[email protected] Jo Eun-hyo, Seo Ji-yun Reporter