HK-tied ELS sellers potentially face full compensation for investor losses

  Sellers of the troubled Hong Kong-tied equity-linked securities (ELS) may have to compensate up to 100 percent of individual traders’ losses depending on how well they informed customers of the risks of the financial products upon sale.     The Financial Supervisory Service (FSS) on Monday laid out a compensation plan for sellers of the Hong Kong-tied ELS, which has caused 1.2 trillion won ($910.5 million) in losses in the first two months of this year. The financial watchdog wrapped up its inspection on the sellers, which includes 11 banks and brokerage firms, on Friday.     “Through the latest inspection, we have found multiple occasions in which the basic principles [of the Financial Consumer Protection Act] have been violated,” said FSS Gov. Lee Bok-hyun during a press conference held in western Seoul, on Monday.   “In particular, some ELS sellers failed to properly manage sales limits on the products when the risks were growing high, and incentivized incomplete sales through performance evaluation measures,” Lee said.     The Hong Kong-tied ELS is linked to the movement of the Hang Seng China Enterprises Index (HSCEI), of which the value has collapsed to half of its 2021 peak.     The FSS estimates an additional loss of 4.6 trillion won this year if the index remains largely unchanged from the current level.   While the FSS expects the compensation ratio will generally range from 20 to 60 percent, the actual amount varies based on a number of criteria in individual cases, and therefore it may cover up to 100 percent or none of the losses.     Assessment criteria include an adequate explanation to the investors, having an internal control system at the selling institutions and characteristics of the traders, like their previous experience in ELS investment.   The FSS said it will swiftly proceed with the dispute settlement and encourage the sellers to voluntarily compensate for the losses incurred. Specific details, such as the compensation ratio for each investor or the total amount of compensations, are yet to be determined, as Monday’s announcement “serves as a starting point of a dispute settlement,” said the regulator.   Potential penalties for the sellers are to be decided later as well.   The sellers may come up with compensations based on the latest plan provided by the FSS on a voluntary basis. The timing of compensation execution depends on the progress of negotiations between the involved parties.   The financial regulator said that it “expects the social and economic costs caused by possible legal disputes to be minimized with the sellers’ voluntary participation to compensation.”   KB Kookmin, Hana and NongHyup banks suspended the sales of all types of ELS following the mounting losses from the ELS linked to HSCEI.  

BY JIN MIN-JI, SHIN HA-NEE [shin.hanee@joongang.co.kr]