The Financial Supervisory Service will announce standards for responsibility sharing as early as next week.
Consideration of incomplete sales by sellers who violate the suitability principle
The decision will likely be made taking into account the principle of investor self-responsibility.
With the confirmed loss of Hong Kong H Index equity-linked securities (ELS) exceeding 600 billion won, the Financial Supervisory Service plans to present standards for responsibility sharing for Hong Kong ELS as early as next week. A plan to determine the amount of compensation based not only on the bank’s mis-selling factors but also on the investor’s investment history is being strongly discussed.
According to the financial sector on the 21st, the principal amount of Hong Kong ELS maturing by the 16th of this month for five banks, including KB Kookmin, Shinhan, Hana, NH Nonghyup, and SC First Bank, is KRW 1.2609 trillion. Of these, 655.8 billion won (52%) recorded confirmed losses.
Recently, the Hong Kong H index is at 5,000, a significant drop compared to 12,000 in 2021. If the low H index continues, losses in the first half of this year are expected to increase rapidly. In particular, as the maturity repayment amount explodes to 2.5553 trillion won in April, the loss is bound to increase.
Currently, the Financial Supervisory Service is organizing cases by type of incomplete sale and specifying compensation standards in order to create standards for responsibility sharing between sellers (banks and securities companies) and investors. The final standards for responsibility sharing are expected to be released as early as next week.
As of now, compensation from sellers seems inevitable as some circumstances of incomplete sales have clearly emerged. Previously, Lee Bok-hyeon, head of the Financial Supervisory Service, announced that he had confirmed a case of inappropriate sales to the elderly who were trying to manage their retirement funds.
This violates the principle of suitability under the Financial Consumer Protection Act. According to the Financial Services and Finance Act, sales companies must not recommend the conclusion of contracts for financial products that are unsuitable for general financial consumers in light of their financial status, experience in acquiring and disposing of financial products, etc.
However, the Financial Services and Finance Act also emphasizes the responsibility of financial investors that ‘financial consumers must acquire the necessary knowledge and information themselves’, so not only the responsibility of the seller who violates the suitability principle but also the scope of the investor’s responsibility are taken into consideration.
In fact, it turned out that many Hong Kong ELS investors were reinvestors. This can also be seen as a sign that investors are aware of the risks of the product to some extent. From the seller’s perspective, these investors can be seen as ‘suitable targets’ to sell high-level products.
Investors’ investment responsibilities were also taken into consideration when the 2019 standards for responsibility sharing for overseas interest rate-linked derivatives-linked products (DLFs) were prepared.
At the time, the financial authorities set a basic compensation ratio of 55%, with 30% for violation of the suitability principle, 20% for poor internal control of the seller, and 5% for consideration of ultra-high-risk products. The rest were applied as individual factors such as investor responsibility. For example, the reason an 80% compensation ratio was applied to an 80-year-old suffering from dementia is because 20% was excluded in accordance with the principle of investor self-responsibility.
In addition, the investment self-responsibility principle is expected to be applied more strictly to those who subscribe to Hong Kong ELS through a securities company rather than a bank. This is because, unlike banks, customers of securities companies can be seen as a group of customers who actively want to invest in the first place. In addition, investors who sign up for products online can also be aware of the possibility of principal loss in advance, so the compensation ratio can be reduced.
In response, an official from the financial authorities said, “We are considering various options,” and “Nothing has been confirmed yet.”
Meanwhile, the banking sector is protesting that the court should prepare the compensation plan, but the financial authorities are of the position that the government (Financial Services Commission) is entrusted with the Financial Supervisory Service to prepare the compensation standard in accordance with the Financial Services Commission Act.
The Financial Supervisory Service said, “In accordance with the Financial Consumer Protection Act (Articles 33, 36, etc.), the Financial Dispute Mediation Committee of the Financial Supervisory Service is in charge of matters related to the mediation of financial-related disputes that arise between financial consumers and financial companies.” He explained.
He continued, “Recently, we have received a number of dispute mediation applications related to Hong Kong H Index ELS, so we are conducting on-site inspections and civil complaint investigations against sellers such as Kookmin Bank,” and added, “We are reviewing various measures to provide damage relief to Hong Kong ELS subscribers, and are seeking prompt dispute mediation.” “We are pursuing it,” he said.
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.