Investors hit by ELS losses demand public audit of financial authorities

A group of people who claim to have suffered from the alleged mis-selling of equity-linked securities (ELS) tied to Hong Kong's Hang Seng China Enterprises Index (HSCEI), along with representatives of civic organizations, stage a protest in front of the Board of Audit and Inspection (BAI) in Seoul, Thursday, calling on the BAI to audit financial authorities. Yonhap

Investors who have incurred significant losses from equity-linked securities (ELS) tied to Hong Kong's Hang Seng China Enterprises Index (HSCEI) have requested the Board of Audit and Inspection of Korea (BAI) to investigate financial authorities. They argue that there have been serious supervisory failures regarding this matter.

"The widespread mis-selling of Hong Kong-tied ELS products is a matter of public interest, causing significant harm to numerous victims. This issue arose due to the failure of both public institutions, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), to properly fulfill their financial supervisory responsibilities," a group composed of the investors as well as civic group members said during a press conference in front of the BAI in central Seoul, Thursday.

They argued that both the FSC and FSS have "illegally and unfairly" taken on their oversight responsibilities.

"Following the massive mis-selling of high-risk derivative-linked funds (DLFs) in 2019, the FSC vowed to enhance regulatory frameworks for high-risk financial products to significantly strengthen consumer protection. Subsequently, financial authorities restricted the sale of high-risk financial products at banks. However, they allowed the sale of high-risk ELS products under certain conditions, due to resistance from the banking sector," the group said.

They added that this situation resulted in numerous victims, primarily clients with deposit accounts who ended up investing their savings without fully understanding the risks associated with the problematic ELS products.

They filed the audit request to urge the BAI to investigate the inspection, regulatory oversight, negligence, and dereliction of duty by the two financial regulators concerning the alleged mis-selling of problematic ELS products by several domestic financial companies.

"As of November 2023, the total outstanding balance of Hong Kong-tied ELS products stood at 19.3 trillion won ($14.4 billion). Out of this balance, 15.4 trillion won, or approximately 80 percent, is due to mature throughout this year, with 10 trillion won concentrated in the first half. Overall, a significant loss of over 5 trillion won is anticipated," the protestors highlighted.

The figures provided by the group align with the estimated damage calculated by the FSS last month. According to data from the financial watchdog, the outstanding balance of such ELS products at domestic financial companies set to mature in the first half of this year amount to 10.2 trillion won.

To prevent principal losses, the Hong Kong stock index would need to experience a significant surge, recovering to at least 65 percent of its level in the first half of 2021. However, considering the downward trend of the index over the past few years, principal losses appear inevitable, with estimated losses totaling around 5 trillion won in the first half of this year alone. As of the first week of this month, losses already incurred from Hong Kong-tied ELS products amounted to 663 billion won.

Meanwhile, the number of complaints related to the alleged ELS mis-selling has surged. A total of 1,410 complaints have been filed at five major banks until this week.

The FSS plans to initiate another round of on-site inspections on banks and brokerages starting next week, with the goal of formulating countermeasures by March.