Five banks hit with W361.6b in fines over Hong Kong ELS mis-selling — FSC's largest-ever sanctions

Fines initially flagged at around 1.4 trillion won ($1.04 billion) against five major banks over the mis-selling of Hong Kong H-index equity-linked securities have been sharply reduced to about 361.6 billion won in the final ruling, following a review process that weighed the degree of violations and legal questions surrounding products sold in the early days of the Financial Consumer Protection Act.

The Financial Services Commission voted Wednesday at its 19th regular meeting to impose fines of 361.96 billion won and penalty surcharges of 1.78 billion won on seven banks — KB Kookmin Bank, Shinhan Bank, Hana Bank, Nonghyup Bank, SC First Bank, Woori Bank and Suhyup Bank — for violating the Financial Consumer Protection Act through the mis-selling of Hong Kong H-index ELS products.

Six securities firms were separately fined 9.28 billion won and assessed penalty surcharges of 1.61 billion won. Combined fines and surcharges for banks and brokerages total about 374.6 billion won, making it the largest monetary sanction the FSC has ever imposed.

The penalty figure was reduced in stages as the case moved through the regulatory process. The Financial Supervisory Service forwarded a proposal in February to impose fines of about 1.4 trillion won on five banks — KB Kookmin Bank, Shinhan Bank, Hana Bank, Nonghyup Bank and SC First Bank — with the banks' voluntary compensation efforts factored into the initial assessment. The FSC then asked the FSS to supplement certain facts and legal interpretations, prompting a re-examination that brought the figure down to about 600 billion won in June.

Industry observers say the reduction reflects a downward revision in the assessment of the banks' "motive" and "method" of violation — each reclassified from "moderate" to "low" — which lowered the applicable fine rate. The fact that this was the first large-scale penalty case under the Financial Consumer Protection Act, and that the violations occurred in the early period after the law took effect, was also said to have been taken into account in setting the final sanction level.

During the FSC's deliberations, key disputes centered on how to treat products sold during the grace period immediately after the Financial Consumer Protection Act took effect when calculating fines, and whether it was appropriate to impose both fines and penalty surcharges simultaneously for violations of the duty to explain.

The FSC said it conducted multiple rounds of review, grounded in thorough legal analysis and a careful examination of the facts, given that this was the first Financial Consumer Protection Act violation case involving a large number of retail investors and major financial institutions.

Looking only at the five banks covered by the original 1.4 trillion won proposal, the final combined fine stands at 361.63 billion won. By institution, KB Kookmin Bank received the largest penalty at 172.33 billion won, followed by Hana Bank at 92.47 billion won, Nonghyup Bank at 40.17 billion won, Shinhan Bank at 38.74 billion won and SC First Bank at 17.9 billion won. Woori Bank was fined 331 million won, while Suhyup Bank was not fined.

The FSC found that the banks had omitted simulation results for projected returns, altered the analysis periods used in product disclosures, and failed to adequately explain the investment risks tied to fluctuations in the underlying asset price when selling H-index-linked products. Some banks were also found to have recommended products to customers without properly reflecting those customers' financial circumstances in their investor-profile assessments.

The FSC plans to introduce detailed guidelines clarifying the disclosure standards for investment products, with implementation set for the first quarter of 2027. It is also pursuing an amendment to the Financial Consumer Protection Act that would require financial firms to operate in the best interests of consumers.