Major banks prepare for dispute mediation over Hang Seng-tied ELS losses

Bank clerk desks at Woori Bank's headquarters in Seoul, Jan. 31 / Yonhap

Major banks have initiated measures to ensure smooth resolutions to compensate investors who suffered substantial losses from Hong Kong-tied equity-linked securities (ELS), following the lenders' acceptance of dispute resolution guidelines set by financial authorities.

Through a series of board meetings, the banks are strengthening their internal teams and establishing advisory groups including outside experts.

According to sources, Monday, major banks will initiate in April compensation for investors who have incurred significant losses from investing in ELS linked to the performance of the Hang Seng China Enterprises Index.

Industry watchers estimate the total compensation could reach 2 trillion won ($1.4 billion).

The banking sector is expediting steps to preempt unfavorable outcomes in anticipation of potential sanctions from the Financial Supervisory Service (FSS) in April. The FSS has identified instances of mis-selling, including cases where banks persuaded risk-averse investors to park their money in high-risk products like ELS. Furthermore, it is believed that some banks encouraged their employees to prioritize selling ELS products by adjusting key performance indicators when evaluating work performance.

Just two days after holding its board meeting, Hana Bank became the first in the banking sector to announce compensatory measures on Friday. The bank established a consultation group and a support team, specifically dedicated to ELS compensation. The consultation group includes outside experts well-versed in financial law and consumer protection.

Woori Bank, which was the first to opt for voluntary compensation, has started reaching out to subscribers with products maturing in April. It formed a special team within its trust department, tasked with examining consumer protection issues and relevant legal regulations.

A group of investors who suffered financial losses from equity-linked securities tied to the performance of the Hang Seng China Enterprises Index stage a protest at KB Kookmin Bank headquarters in Seoul, Friday. Yonhap

Other banks, still in the preparation phase, are also accelerating their efforts.

KB Kookmin Bank set up a consultation group to work alongside its existing consumer protection department, enhancing the support process. Similarly, Shinhan Bank formed a consultation group that includes outside experts knowledgeable in financial products. NH Nonghyup Bank and Standard Chartered Bank Korea also established similar teams.

Despite major banks agreeing to voluntary compensation, a smooth resolution with investors appears unlikely. Some investors are steadfast in their refusal to settle, opting instead to await outcomes from the FSS dispute mediation committee or to proceed with individual lawsuits.

Even if investors agree to the compensation guidelines, accepting the voluntary settlement offer could still present significant challenges during the negotiations over compensation percentages. A representative group of ELS investors is pushing for full compensation, citing mis-selling by the banks. The FSS's guidelines are expected to allow compensation that covers 20 to 60 percent of losses, depending on the individual circumstances.

According to data provided by Rep. Oh Gi-hyoung of the main opposition Democratic Party of Korea, in February alone, there were 1,138 ELS-related dispute resolution requests filed with the FSS.