Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
20-60% compensation expected for HK-tied ELS losses
Financial Supervisory Service (FSS) Governor Lee Bok-hyun speaks at a press conference unveiling compensation guidelines for people affected by misleading sales of Hong Kong stock index-tied derivative products by financial institutions at FSS headquarters in Seoul, Monday. Yonhap
By Anna J. Park
FSS presents guidelines on effective compensation for investors
Financial authorities expect the majority of individuals who suffered from soured investments in equity-linked securities (ELS) tied to the Hong Kong stock market index to be compensated for 20 to 60 percent of their confirmed investment losses. This comes after the discovery of numerous instances of mis-selling financial products that left many mom-and-pop investors suffering huge losses.
Mis-selling refers to a deceptive sales practice where a financial product or service is marketed using false or misleading information or does not align with a customer's needs or financial situation.
On Monday, the Financial Supervisory Service (FSS) announced a set of compensation guidelines that can be voluntarily applied by each financial company in determining compensation for investors who suffered losses due to banks failing to properly notify them of the risks.
The state-run financial watchdog agency estimates that the combined losses from the products suffered by domestic investors are estimated at nearly 6 trillion won ($4.5 billion).
According to the guidelines, banks and brokerages have the potential to compensate customers for up to 100 percent of their investment losses. The exact compensation rate for each case will be determined based on various factors, including proven negligence or wrongdoings by financial companies, as well as the individual characteristics of each investor, such as prior investment experience and financial knowledge.
"Although we haven't looked into all cases, a majority of the investors are expected to get 20 percent to 60 percent of their losses in compensation. But the specific compensation ratio may vary widely, depending on individual factual circumstances," Lee Se-hoon, first senior deputy governor of the FSS, said during a press conference.
Financial Supervisory Service (FSS) First Senior Deputy Governor Lee Se-hoon answers reporters' questions during a press conference on compensation guidelines for losses incurred from Hong Kong stock index-tied equity-linked securities at FSS headquarters in Seoul, Monday. Yonhap
Lee added that the overall rate of compensation is expected to be lower than the previous massive mis-selling cases related to derivatives-linked funds (DLF) in 2019, where the rate varied from 40 percent to 80 percent in general. The decrease in the ratio can be attributed to financial companies being more likely to have met the minimum level of legal conditions, particularly in terms of formal requirements such as signing investment agreements, compared to the situation in 2019.
Despite the improvements in formal requirements, the FSS highlighted that financial companies were still found to be significantly lacking in terms of efforts to adhere to customer protection measures and ensure consumer benefits.
Financial Supervisory Service (FSS) Governor Lee Bok-hyun speaks during a press conference on compensation guidelines on the mis-selling of Hong Kong stock index-tied derivative products at FSS headquarters in Seoul, Monday. Yonhap
Sanctions on sellers to be discussed later
The compensation guidelines were drawn up after the FSS conducted on-site inspections for two months from early January on 11 financial companies that sold the problematic ELS products.
The sellers include five banks — KB Kookmin, Shinhan, Hana, NH NongHyup and Standard Chartered — as well as six brokerage firms — Korea, Mirae Asset, Samsung, KB, NH and Shinhan Securities.
"Many sellers of the ELS products were found to have actually encouraged mis-selling by not putting appropriate restraints in selling such products when the risk of customer losses was pronounced. As a result, various types of mis-selling took place at financial companies where their sales systems did not adhere to principles of suitability, showing the overall deficiencies in sales policies and consumer protection practices," FSS Governor Lee Bok-hyun said during the press conference.
He went on to underscore that the FSS has been working extra hard to ensure that the dispute resolution scheme would strike a balance between the right to appropriate compensation and the principle of investor responsibility.
Regarding sanctions or penalties on the institutions to be held accountable, the FSS said discussions on these matters will be held at a later time. The agency emphasized that the current priority is to minimize the potential social and economic costs arising from prolonged legal disputes.