[Exclusive] Hong Kong ELS surcharge narrowed to 370 billion won from 600 billion; no double imposition of administrative fines expected

The Financial Services Commission has settled on imposing surcharges totaling 370 billion won on five banks regarding incomplete sales of Hong Kong H-Index ELS (Equity-Linked Securities). This appears to be a reduction of over 1 trillion won compared to the decision by the Financial Supervisory Service's Sanctions Review Committee in February to impose surcharges amounting to 1.4 trillion won. The financial authorities have decided to recognize only surcharges, rather than both surcharges and administrative fines, for cases where double penalties were imposed due to violations of disclosure obligations.

According to financial industry sources on the 3rd, the Financial Services Commission held a case review subcommittee meeting in the afternoon that day and decided on sanctions involving 370 billion won in surcharges related to Hong Kong ELS for five banks (KB Kookmin, Shinhan, Hana, NH NongHyup, and Standard Chartered Bank Korea). The sanction proposal from the subcommittee is scheduled to be put on the agenda for the Financial Services Commission's regular meeting tomorrow (the 4th).

This represents a reduction of over 200 billion won compared to the 600 billion won in surcharges reported by the Financial Supervisory Service to the Financial Services Commission last June. In particular, it is a cut of over 1 trillion won from the sanction level of 1.4 trillion won decided at the Financial Supervisory Service's Sanctions Review Committee in February.

It was reported that KB Kookmin Bank, which had the highest number of incomplete sales cases among the banks, reached a conclusion to impose surcharges of approximately 172 billion won. It is known that Shinhan Bank was decided at 38 billion won, Hana Bank at 92 billion won, NH NongHyup Bank at 50 billion won, and Standard Chartered Bank Korea at approximately 18 billion won in surcharges, respectively. The subcommittee's conclusion is not a final decision; the Financial Services Commission's regular meeting will make the final determination.

The reason for the significant reduction in surcharges by the subcommittee compared to the Financial Supervisory Service's proposal is that financial authorities issued non-enforcement opinion letters for approximately six months after the enactment of the Financial Consumer Protection Act. For six months after the issuance of a non-enforcement opinion letter, financial authorities may exempt sanctions if there are no serious violations. In particular, because large-scale losses from Hong Kong ELS were concentrated during this period, banks became eligible for surcharge reductions amounting to hundreds of billions of won due to the Financial Services Commission's discretionary mitigation.

It is also known that discussions regarding the double imposition of surcharges and administrative fines on financial institutions took place at the subcommittee meeting that day. In cases where both surcharges and administrative fines were doubly imposed due to violations of disclosure obligations in the sales process of Hong Kong ELS, discussions proceeded toward imposing only surcharges.

However, for violations of appropriateness and suitability, which are not subject to surcharge imposition, the imposition of administrative fines remains as before. The administrative fines notified by the Financial Supervisory Service for each bank range from several billion won to tens of billions of won, which is not large compared to the surcharges.

If the subcommittee's conclusion on surcharges is finalized at tomorrow's regular meeting, the Hong Kong ELS incident will be temporarily concluded approximately three years after the Financial Supervisory Service's inspection in November 2023. The sanctions for incomplete sales of Hong Kong ELS are the first large-scale surcharge case to occur since the enactment of the Financial Consumer Protection Act in 2021.

The Financial Consumer Protection Act stipulates the imposition of punitive-level surcharges for violations of disclosure obligations and unfair inducements, among others. In particular, for financial investment products like Hong Kong ELS, surcharges are imposed based on the principal amount invested rather than the fees earned by financial institutions, sparking controversy over "trillion-won scale" sanctions.

Whether financial institutions will file administrative lawsuits once the financial authorities' sanctions are finalized is also a point of interest. Although significantly reduced compared to the initially anticipated surcharge levels, KB Kookmin Bank faces surcharges close to 200 billion won, making the possibility of litigation unavoidable. In particular, attention in the financial industry is focused on whether Standard Chartered Bank Korea, a foreign-affiliated bank, will file a lawsuit.