Lee Bok-hyun "Bank ELS Consumer Damage Prevention Measures Are Merely Self-Exculpation"

Review of Responsibility Sharing Standards Between Financial Companies and Consumers

Lee Bok-hyun, Governor of the Financial Supervisory Service [Image source=Yonhap News]

Lee Bok-hyun, Governor of the Financial Supervisory Service, sharply criticized banks' consumer damage prevention measures as 'self-exculpation' on the 29th in relation to concerns over massive losses from Hong Kong H Index equity-linked securities (ELS).

On the same day, after a meeting with CEOs of asset management companies held at the Korea Financial Investment Association in Yeouido, Governor Lee told reporters, "The fact that high-risk, complex products were sold in bulk to elderly customers at bank counters, of all places, during a specific period raises doubts about whether the suitability principle was properly observed," adding, "Regardless of whether explanations were given, it seems necessary to review whether the solicitation itself was appropriate."

He continued, "Honestly, even I find it hard to absorb the information when looking at dozens of pages (of explanatory documents)," and criticized, "I was told to answer 'yes, yes' to questions, so I did, but we need to consider whether that alone can exempt responsibility."

Governor Lee pointed out, "Banks and others claim that they obtained handwritten statements and secured recordings, asserting that there were no elements of incomplete sales or that consumer damage prevention was implemented," but added, "However, considering the suitability principle and the purpose of the Financial Consumer Protection Act regarding product sales, it sounds like they took measures just to cover themselves."

He said, "I think it is appropriate to establish some standards for sharing responsibility between financial companies and consumers," and added, "We are currently trying to ascertain the basic facts within the year, but there are some complaints and anticipated dispute resolution situations."

However, Governor Lee explained that the degree of responsibility sharing may vary. He said, "We will consider various scenarios, such as whether the customer came with surplus funds and the purpose of significantly increasing them despite principal loss, or whether the product was recommended as principal-protected instead of a fixed deposit for retirement living expenses that must not be lost," adding, "There may be parts where responsibility must be taken."

He expressed the view that "there are criticisms that explanations related to financial investment products or insurance products are excessively formalistic, providing only grounds for exemption to financial companies, while consumers do not effectively receive notifications, resulting in time-consuming and labor-intensive problems," and indicated the need for future improvements.

Governor Lee particularly continued his criticism toward KB Kookmin Bank, which sold the most Hong Kong H Index-linked ELS among banks. He said, "Out of a total of 19 trillion won, 8 trillion won was handled by one bank, KB Kookmin Bank. It's not about limits," adding, "Securities companies could not sell because they did not have customers coming with retirement funds. The bank side needs to seriously consider how to handle consumers who come to the bank counters, symbols of trust and authority."

Meanwhile, massive losses from Hong Kong H Index equity-linked securities (ELS) are expected to begin in earnest from January next year. According to the financial sector, the outstanding balance of Hong Kong H Index-linked ELS sold by the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) maturing in the first half of next year amounts to a total of 8.41 trillion won. Considering the product structure and current stock price levels, the financial sector anticipates principal losses in the range of 3 to 4 trillion won.