Financial regulators' sanctions against banks over the mis-selling of equity-linked securities (ELS) tied to Hong Kong's H-share index have effectively been sent back to the drawing board. The Financial Supervisory Service (FSS) had forwarded a 1.4 trillion won fine proposal to the Financial Services Commission (FSC), but the commission has asked the FSS to reexamine the legal reasoning behind the sanctions.
The FSC held a regular meeting Wednesday and requested that the FSS review its proposed sanctions against banks and securities firms involved in the mis-selling of Hong Kong H-index ELS products. "Based on discussions in the agenda review subcommittee, we asked the FSS to supplement some factual findings, applicable laws, and legal reasoning in the sanction proposal," the FSC said.
It is unusual for the FSC to send back the FSS's sanction proposals. A comparable case occurred in 2018, when the FSC's Securities and Futures Commission asked the FSS to supplement its accounting audit measures against Samsung Biologics.
In February, the FSS proposed a combined 1.4 trillion won in fines on KB Kookmin, Shinhan, Hana, NH Nonghyup, and SC First Bank over the mis-selling of H-index ELS products and delivered the proposal to the FSC. The FSS initially calculated the fine at approximately 4 trillion won, which was later reduced to around 2 trillion won through discussions and then further lowered to 1.4 trillion won.
At the FSC meeting, members reportedly raised concerns that the fine amount was excessive and that the basis and process for the calculation were partly inadequate. The finalization of the Hong Kong H-index ELS mis-selling measures, initially expected around mid-March, has been repeatedly delayed. "There were opinions that establishing the facts and the legal reasoning to be applied were ambiguous, so I understand the FSC and the FSS governor have been discussing the matter over the past one to two weeks," a source familiar with the financial authorities said.
As a result, industry observers expect the ELS fine could be substantially reduced. Since banks have been conducting voluntary compensation, a finalized fine could trigger a wave of lawsuits. Some interpret the FSC's cautious stance as reflecting concerns that a large fine could weaken financial firms' capacity for productive and inclusive lending. "The FSC can be seen as having passed the ball back to the FSS," another financial industry official said.
