FSC Slaps Record 371.2 Billion Won in Penalties on 13 Banks and Brokerages over Mis-sold Hong Kong H-Index ELS
Sanctions totaling roughly 374.6 billion won—the largest ever—have been finalized against 13 banks and brokerages over the 'Hong Kong H-Index equity-linked securities (ELS)' incident, which left investors with heavy losses after the Hong Kong market plunged. At its regular meeting on the 4th, the Financial Services Commission decided to impose fines of 371.242 billion won and surcharges of 3.39 billion won on 7 banks and 6 brokerages. When losses were confirmed on products maturing in 2024, the Financial Supervisory Service conducted on-site inspections to determine whether the sales process violated the law.
The banking sector was hit with fines of 361.96 billion won and surcharges of 1.778 billion won, totaling 363.738 billion won. KB Kookmin Bank received the largest penalty at 173.634 billion won, combining a fine of 172.334 billion won and a 1.3 billion won surcharge, followed by Hana Bank at 92.475 billion won. The two banks' sanctions alone accounted for 266.109 billion won, or 73.2% of the total for banks. They were followed by NH Nonghyup Bank at 40.595 billion won, Shinhan Bank at 38.745 billion won, SC First Bank at 17.916 billion won, and Woori Bank at 330 million won. Suhyup Bank received only a 42 million won surcharge, with no fine. Among brokerages, Korea Investment & Securities received the largest penalty at 9.257 billion won (a fine of 9.245 billion won plus a 12 million won surcharge), followed by Samsung Securities at 1 billion won, Mirae Asset Securities at 304 million won, KB Securities at 300 million won, NH Investment & Securities at 23 million won, and Shinhan Investment & Securities at 10 million won.
A notable feature of the sanctions is that the fine shrank substantially during deliberations. The fine initially calculated by the FSS at around 4 trillion won was reduced to roughly 2 trillion won at the first sanctions review committee in November last year, and to about 1.4 trillion won at the second review in February this year. In May, the FSC sent the proposal back to the FSS, citing the need to supplement facts and applicable laws, and the FSS re-examined its calculation basis and reported back in June with a sanction of about 600 billion won. The final decision reflects an additional reduction of some 230 billion won from that figure. However, the FSC did not disclose the specific amounts by reason for reduction.
The key violations confirmed by the authorities include the omission of loss-risk explanations, overly simplified explanations of profit-and-loss structures, and recommending high-risk products based on investment propensity assessments that failed to reflect customers' financial circumstances. When selling equity-linked trusts (ELTs) involving the Hong Kong H-Index, some banks omitted from their explanatory materials the results of return simulations based on past index movements, or used materials with altered analysis periods. There were also cases where profit-and-loss structures were explained too simply, failing to adequately inform customers of loss risks in times of high volatility. Some brokerages were also found to have omitted risk-rating cautions and violated the obligation to prohibit inappropriate solicitation.
The FSC explained that it went through multiple rounds of deliberation, given that this is the first large-scale case involving violations of the Financial Consumer Protection Act affecting numerous consumers and major financial institutions. To prevent recurrence, it will establish guidelines for explaining investment products, to take effect in the first quarter of next year, and will also push for an amendment to the Financial Consumer Protection Act imposing on financial companies the duty to act in consumers' best interests. The FSC said, "Going forward, we will continue to take swift and stern action against violations of the Financial Consumer Protection Act, such as mis-selling, and will actively pursue the recovery of unjust gains through the imposition of fines."
