[Edaily Reporter Choi Jeong Hoon ] Financial authorities have imposed a total of 374.6 billion won in administrative fines and penalties on 13 banks and securities firms in connection with the mis-selling of Hong Kong H-Index equity-linked securities (ELS). This marks the largest financial penalty ever imposed by the Financial Services Commission. However, compared to the approximately 4 trillion won in fines initially calculated by the Financial Supervisory Service, the final amount imposed was reduced to about one-tenth of that figure.
The Financial Services Commission announced on the 4th that it held its 19th regular meeting and finalized a decision to impose administrative fines totaling 371.242 billion won and penalties totaling 3.39 billion won on seven banks and six securities firms for violating the Financial Consumer Protection Act in connection with the mis-selling of Hong Kong H-Index ELS products.
The Hong Kong H-Index ELS crisis refers to the incident in which investors suffered significant principal losses as the Hong Kong stock market plummeted starting in the second half of 2023. ELS is a financial product whose returns are determined by the movements of underlying assets, such as stock indices; while investors receive the agreed-upon return if certain conditions are met, they may suffer principal losses if the index drops significantly. Controversy over mis-selling arose particularly because a large number of general investors, including the elderly, purchased these products through bank branches.
As massive losses materialized in products that matured in 2024, the Financial Supervisory Service (FSS) conducted on-site inspections to investigate whether banks had adequately explained the risk of loss and whether they had sold the products in a manner appropriate to customers’ investment profiles. Subsequently, financial authorities established voluntary compensation guidelines to facilitate recovery for victims while proceeding with sanction procedures regarding potential violations of the Financial Consumer Protection Act.
The financial authorities reached a conclusion today and imposed a total of 363.738 billion won on the banking sector, consisting of 361.96 billion won in administrative fines and 1.778 billion won in penalties. The sanctions against six securities firms totaled 10.894 billion won, comprising 9.282 billion won in administrative fines and 1.612 billion won in penalties.
By bank, KB Kookmin Bank faced the highest penalty at 173.634 billion won. This amount consists of an administrative fine of 172.334 billion won and an administrative penalty of 1.3 billion won. Hana Bank followed with 92.475 billion won. The penalties for these two banks alone totaled 266.109 billion won, accounting for 73.2% of the total penalties imposed on the banking sector.
Next were NH Nonghyup Bank with 40.595 billion won, Shinhan Bank with 38.745 billion won, SC First Bank with 17.916 billion won, and Woori Bank with 331 million won. The National Federation of Fisheries Cooperatives Bank was not assessed any administrative fines but was charged an administrative penalty of 42 million won.
Among securities firms, Korea Investment & Securities was hit with the highest total penalty of 9.245 billion won, consisting of a 9.245 billion won administrative fine and a 12 million won administrative penalty. Samsung Securities was fined 1 billion won, Mirae Asset Securities 304 million won, and KB Securities 300 million won. NH Investment & Securities and Shinhan Investment Securities were fined 23 million won and 10 million won, respectively.
A notable aspect of these sanctions is that the amount of administrative fines was significantly reduced during the deliberation process. The Financial Supervisory Service (FSS) initially estimated the administrative fines for the mis-selling of Hong Kong ELS products at approximately 4 trillion won. Subsequently, the amount was lowered to approximately 2 trillion won at the first Sanctions Deliberation Committee meeting in November of last year, and further reduced to approximately 1.4 trillion won at the second meeting in February of this year.
Last May, the Financial Services Commission (FSC) returned the sanction proposal to the FSS, stating that further clarification was needed regarding certain facts, applicable laws, and legal principles. Subsequently, the FSS reexamined the basis for calculating the fines and resubmitted a proposal in June for sanctions totaling approximately 600 billion won. In this final resolution, the amount was reduced by an additional 230 billion won compared to that figure.
Analysts attribute the reduction in fines to the banks’ voluntary compensation efforts. It is understood that the decision reflected the banks’ efforts to compensate investors for their losses and their review of the scope for calculating fines on certain sales. However, the FSC did not disclose specific amounts for each reason for the reduction in its announcement that day.
The primary violation identified by financial authorities was a failure to adequately explain investment risks. While selling equity-linked trusts (ELTs) that included the Hong Kong H-Index, some banks omitted from their prospectuses the results of yield simulations—which calculated potential gains and losses based on past index movements. Others used prospectuses that altered the analysis period.
There were also cases where the profit-and-loss structure of the products was explained in an overly simplistic manner. Specifically, they failed to adequately inform customers how the risk of loss changes when the volatility of the underlying stock index increases. Some banks recommended high-risk products based on investment risk assessments that did not reflect the customers’ financial circumstances. Cases were also identified at securities firms where risk-rating-related precautions were omitted or where the obligation to refrain from improper solicitation was violated.
The Financial Services Commission (FSC) explained that it conducted multiple deliberations on these sanctions, noting that this is the first large-scale case of violations of the Financial Consumer Protection Act involving a large number of financial consumers and major financial institutions. The FSC maintains that it has clearly established financial companies’ responsibility for mis-selling through the largest monetary sanctions in history.
Financial authorities are also pushing for institutional reforms to prevent recurrence. They plan to establish “Guidelines for Explaining Investment Products” to help investors easily understand the structure and risk of loss associated with complex financial products, with implementation scheduled for the first quarter of next year. They are also pushing for amendments to the Financial Consumer Protection Act to ensure that financial companies sell products with the consumer’s best interests in mind.
The Financial Services Commission stated, “Going forward, we will continue to impose swift and strict sanctions for violations of the Financial Consumer Protection Act, such as mis-selling, and will actively pursue the recovery of unjust enrichment through the imposition of administrative fines.”
