Banks prepare to resume ELS sales, eyeing boost in non-interest income
Tellers and customers are seen at a bank in Seoul, Feb. 26, 2024. Newsis
Banks are preparing to resume sales of equity-linked securities (ELS) after their suspension following a controversy over the mis-selling of products tied to the Hang Seng China Enterprises Index (HSCEI) in Hong Kong, industry officials said Wednesday.
They noted that ELS products are viewed as a potential new source of non-interest income.
However, with financial authorities taking longer than expected to finalize guidelines, banks are unlikely to restart sales in September as initially anticipated, and are instead preparing to resume as early as October.
ELS products are structured financial instruments with returns tied to the performance of a specific stock or stock index.
The HSCEI ELS controversy centered on significant consumer losses amid a combination of unfavorable factors such as China’s property market restrictions, U.S.-China tensions and global interest rate hikes.
Banks came under fire for causing heavy losses by selling large volumes of complex, high-risk financial products without providing sufficient explanation to buyers.
In response, the Financial Services Commission (FSC), the country's top financial regulator, introduced preventive measures in February, requiring banks to sell ELS only through specialized staffers with the necessary qualifications and within physically separate areas at designated branches.
The separation of sales counters is designed to prevent customers from mistaking investment products for principal-protected products.
According to government insiders, guidelines have recently been drawn up allowing banks to operate dedicated branches for high-risk financial products at around 30 percent of all locations — a larger share than the 5 to 10 percent the FSC originally envisioned in February.
Banks are now in the process of designating these branches with the expectation that sales resumption will bolster non-interest income, supported by a stock market rally that has boosted ELS issuance.
Data from the Korea Securities Depository shows issuance this year reached 27.93 trillion won ($20 billion) as of Aug. 25, up 16.3 percent from a year earlier.
“With commercial bank deposit rates now in the low-2 percent range, ELS products are becoming more attractive to investors,” a banking industry official said.
Another official, however, was more cautious, saying, “ELS were once a flagship product, but with many consumers now holding negative views, it will be difficult for sales to return to previous levels.”
Lee Chan-jin, the new governor of the Financial Supervisory Service (FSS), delivers an address during his appointment ceremony at FSS headquarters in Seoul, Aug. 14. Yonhap
Meanwhile, Lee Chan-jin, the new governor of the Financial Supervisory Service, is expected to accelerate the process of penalizing banks involved in the mis-selling of HSCEI-tied products.
The financial watchdog plans to bring the issue to the sanctions review committee as early as next month, as further delays are not possible since the five-year statute of limitations will begin expiring at the end of this year.
Total sales of the products at the five major banks amounted to about 16 trillion won, theoretically putting the maximum fine at 8 trillion won.
However, since not all transactions involved mis-selling and the Act on the Protection of Financial Consumers allows fine reductions depending on compensation provided, industry estimates suggest the actual penalty will likely settle closer to 2 trillion won.
Tensions in the banking sector are rising as the lawyer-turned-governor continues to emphasize consumer protection since taking office on Aug. 14. He is scheduled to meet with the head of the Korea Federation of Banks and CEOs of domestic banks on Thursday.