[Hong Kong ELS Compensation] Maximum Compensation Rate Likely to Be 70~80%... What Are the Compensation Rates by Case?

Many ELS Subscriptions but 'Loss Experience' High-Value Investments at '0%'
100% Compensation Cases Are Rare
Various Cases by Age, Investment Experience, and Amount
About '75%' Compensation for Savings Purpose, Very Elderly, and First-Time Subscribers

According to the loss dispute adjustment criteria for Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) equity-linked securities (ELS) presented by the Financial Supervisory Service (FSS) on the 11th, investors who have experienced losses with ELS or whose cumulative returns from previous ELS investments exceed the current Hong Kong ELS investment loss, indicating significant investor responsibility, may not receive any compensation for losses.

Also, reviewing various items in the loss dispute adjustment criteria presented by the FSS, it seems unlikely that the maximum compensation ratio will reach 100%. The maximum compensation ratio is expected to be decided at around 70-80%.

Investors who confirmed losses after subscribing to Hong Kong H Index ELS will receive different compensation ratios depending on the sales channel such as banks or securities firms and their past investment experience. If a basic compensation ratio of 20-40% is applied due to the sales company factor, and the investor has subscribed to ELS two times or fewer and has no past knock-in or loss experience and is elderly, theoretically, they could be compensated up to 100% of the loss, but realistically, it is likely to be around 70-80%. The FSS presented 10 actual cases by compensation ratio, with the highest compensation ratio being around 75%. On the other hand, even when the basic compensation ratio is applied, the compensation ratio may be reduced depending on investor-specific factors such as investment scale and experience, and there were cases where investors did not receive any refund of their investment capital at all.

The FSS plans to promptly proceed with dispute adjustment procedures by selecting representative cases and have each sales company autonomously compensate according to the criteria. How will the compensation ratio vary depending on sales channel, age, investment experience, investment amount, and other various scenarios? Here are 10 cases presented by the FSS.

① A man in his 50s who invested 100 million KRW in ELS on a bank employee’s recommendation… 62 subscription experiences, 1 loss experience

Mr. S, a man in his mid-50s with 62 past ELS product subscriptions and one loss experience, was recommended an ELS product by a bank employee at a branch of Gye (癸) Bank in January 2021 and invested 100 million KRW. The maturity came due in January this year, resulting in a loss. The FSS investigation found that Mr. S had a total of 62 ELS subscription experiences and that his cumulative profit from past ELS investments exceeded the loss amount of this Hong Kong H ELS, indicating extensive ELS investment experience. Additionally, the FSS confirmed through inspection that the bank violated its duty to explain by omitting some investment risks when explaining the ELS product, had poor internal controls, and failed to keep investment solicitation documents.

Mr. S can be applied a compensation ratio of 35% due to sales company factors: a basic compensation ratio of 20% for violation of the duty to explain under the old Capital Markets Act, plus 10 percentage points for poor internal controls, and 5 percentage points for violation of the obligation to keep investment solicitation documents. However, since Mr. S had 62 past ELS subscriptions and one loss experience, 10 percentage points and 15 percentage points are deducted respectively under investor consideration factors. Also, since the subscription amount was over 50 million KRW and up to 100 million KRW, 5 percentage points are deducted, and since the cumulative ELS profit exceeded the current loss, another 10 percentage points are deducted. Therefore, even if Mr. S’s confirmed loss amount is 50 million KRW, there is no compensation amount he can receive.

② An early 80s elderly person who invested 25 million KRW for bank deposit purposes

Mr. J, in his early 80s, visited a branch of Gap (甲) Bank in January 2021 to open a deposit account and was recommended an ELS product by a bank employee, subscribing for 25 million KRW. The maturity came due in January this year, confirming a loss. The FSS inspection found that Gap Bank violated its duty to explain by omitting or distorting some investment risks when explaining the ELS product, had poor internal controls, and further confirmed violations of individual suitability principles, prohibition of unfair solicitation, and failure to comply with elderly protection standards at the branch counters.

In this case, Mr. J can receive a compensation ratio of 50% due to sales company factors: 20% basic compensation for violation of the duty to explain under the old Capital Markets Act, plus additional responsibility for violation of suitability principles, prohibition of unfair solicitation, and poor internal controls. Additionally, 15 percentage points are added because Mr. J was an ultra-elderly person aged 80 or above at the time of subscription and because the sales company failed to comply with elderly protection standards. Considering the deposit purpose, another 10 percentage points are added, bringing the total compensation ratio to 75%.

③ An early 80s elderly person who invested 50 million KRW on a bank employee’s recommendation

Mr. J, who had two ELS subscription experiences, no delayed repayment, knock-in, or loss experience, and a subscription amount below 50 million KRW, is not subject to ratio adjustments. If the confirmed loss is 12 million KRW, he can receive 9 million KRW back from Gap Bank.

Mr. K, in his early 80s, visited a branch of Eul (乙) Bank in January 2021 and was recommended an ELS product by a bank employee, subscribing for 50 million KRW. The maturity came due in January 2024, confirming a loss. The FSS inspection found that Eul Bank violated its duty to explain by omitting some investment risks, had poor internal controls, failed to keep investment solicitation documents, and did not comply with elderly protection standards. Additional violations of individual suitability principles and prohibition of unfair solicitation were also confirmed at the branch counters.

In this case, Mr. K can receive a 40% compensation ratio due to violation of the duty to explain under the old Capital Markets Act, suitability principle violations, and prohibition of unfair solicitation. Adding 10 percentage points for poor internal controls and 5 percentage points for violation of the obligation to keep investment solicitation documents, the sales company factor compensation ratio reaches 55%.

Considering investor factors such as being an ultra-elderly person at subscription who was not protected by elderly protection standards, having ELS subscription experience, no delayed repayment, knock-in, or loss experience, and a subscription amount of 50 million KRW or less, the total compensation ratio is expected to be around 70%. If the confirmed loss was 25 million KRW, the compensation amount would be 17.5 million KRW from Eul Bank.

④ A mid-40s full-time housewife who invested 40 million KRW in ELS for severe illness diagnosis fund deposit on a bank employee’s recommendation

Ms. L, a mid-40s full-time housewife, visited a branch of Byeong (丙) Bank in February 2021 to deposit a severe illness diagnosis fund for treatment purposes and was recommended an ELS product by a bank employee, subscribing for 40 million KRW for the first time. The maturity came due in February 2024, confirming a loss. The FSS inspection found that Byeong Bank violated its duty to explain by omitting some investment risks, had poor internal controls, and failed to keep investment solicitation documents.

In this case, Ms. L can receive a 40% compensation ratio due to sales company factors: 20% basic compensation for violation of the duty to explain under the old Capital Markets Act, plus 10 percentage points for poor internal controls, 5 percentage points for violation of the obligation to keep investment solicitation documents, and 5 percentage points for negligence of suitability principles. Additionally, 10 percentage points are added for depositing the severe illness diagnosis fund for treatment purposes, 5 percentage points for being a full-time housewife (financially vulnerable group), and 5 percentage points for first-time ELS investment, resulting in compensation of 60% of the confirmed loss amount. If the loss was 20 million KRW, Ms. L could receive 12 million KRW from Byeong Bank.

⑤ A man in his early 60s who invested 10 million KRW in ELS for the first time on a securities firm employee’s recommendation

Mr. M, in his early 60s, visited a branch of Jeong (丁) Securities in March 2021 and was recommended an ELS product by a securities firm employee, subscribing for 10 million KRW for the first time. The maturity is due in March this year, with a possibility of loss. The FSS inspection found that Jeong Securities had poor internal controls, delayed delivery of subscription documents, did not conduct monitoring calls, and additional violations of prohibition of unfair solicitation and duty to explain were confirmed at the branch counters.

Mr. M can receive a 50% compensation ratio due to securities firm responsibility: 35% for violation of prohibition of unfair solicitation and duty to explain under the old Capital Markets Act, plus 15 percentage points for poor internal controls, delayed delivery of subscription documents, and failure to conduct monitoring calls. Considering that this is his first ELS investment, 5 percentage points are added, resulting in a total compensation ratio of about 55%. If the confirmed loss after maturity is 5 million KRW, he can receive 2.75 million KRW from the securities firm.

⑥ A man in his early 70s who invested 60 million KRW in ELS on a bank employee’s recommendation (maturity not yet reached)

Mr. N, in his early 70s, visited a branch of Mu (戊) Bank in April 2021 and was recommended an ELS product by a bank employee, subscribing for 60 million KRW for the first time. The maturity is due in April 2024, with a possibility of loss. The FSS inspection found that Mu Bank violated suitability principles by not considering some investor information when analyzing investor propensity, distorted some investment risks when explaining the product, violated the duty to explain, and had poor internal controls.

In this case, Mr. N can receive a 40% compensation ratio due to sales company factors: 30% basic compensation for violation of suitability principles and duty to explain under the Financial Consumer Protection Act, plus 10 percentage points for poor internal controls. Considering investor factors such as being elderly (65 years or older) at subscription (+5 percentage points), first-time ELS investment (+5 percentage points), and subscription amount over 50 million KRW up to 100 million KRW (-5 percentage points), the total compensation ratio is expected to be around 45%. If a loss of 30 million KRW is confirmed at maturity, Mr. N can receive 13.5 million KRW from Mu Bank.

⑦ A man in his mid-30s who invested 40 million KRW on a bank employee’s recommendation

Mr. O, in his mid-30s, visited a branch of Gi (己) Bank in April 2021 and was recommended an ELS product by a bank employee, subscribing for 40 million KRW. The maturity is due in April 2024, with a possibility of loss. The FSS inspection found that Gi Bank violated suitability principles by not considering some investor information when analyzing investor propensity, omitted some investment risks when explaining the product, violated the duty to explain, had poor internal controls, and failed to keep investment solicitation documents.

In this case, Mr. O can receive a 45% compensation ratio due to sales company factors: 30% basic compensation for violation of suitability principles and duty to explain under the Financial Consumer Protection Act, plus 10 percentage points for poor internal controls, and 5 percentage points for violation of the obligation to keep investment solicitation documents. Considering investor factors such as being in mid-30s at subscription, 17 ELS subscription experiences, no delayed repayment, knock-in, or loss experience, and subscription amount of 50 million KRW or less, the total compensation ratio is expected to be around 45%. If the final confirmed loss is 20 million KRW, Mr. O can receive 9 million KRW from Gi Bank.

⑧ A man in his early 40s who invested 60 million KRW in ELS via smartphone after a bank employee’s recommendation

Mr. P, in his early 40s, visited a branch of Gyeong (庚) Bank in February 2021 and was recommended an ELS product by a bank employee. He then invested 60 million KRW via smartphone, and the maturity came due in February this year, confirming a loss. The FSS inspection found that Gyeong Bank violated the duty to explain by omitting some investment risks and had poor internal controls.

Mr. P can first receive a basic compensation ratio of 20% for violation of the duty to explain under the old Capital Markets Act, plus 10 percentage points for poor internal controls and 5 percentage points for negligence of suitability principles, totaling 35% due to sales company factors. Although non-face-to-face subscriptions usually add 5 percentage points for poor internal controls, since Mr. P visited the branch and was encouraged to subscribe non-face-to-face by a bank employee, it is effectively considered a face-to-face subscription.

Considering investor factors, Mr. P has no delayed repayment, knock-in, or loss experience but has 8 ELS subscription experiences and a subscription amount over 50 million KRW up to 100 million KRW, resulting in a 5 percentage point deduction. Therefore, the total compensation ratio for the loss is about 30%. If the confirmed loss is 30 million KRW, Mr. P can receive only 9 million KRW from the bank.

⑨ An employee of a non-profit public interest foundation who subscribed 22.24 million KRW to ELS on a bank employee’s recommendation

An employee of the non-profit public interest Q Foundation visited a center of Sin (辛) Bank in March 2021 and was recommended an ELS product by a bank employee, subscribing for 22.24 million KRW for the first time. The maturity is due in March 2024, with a possibility of loss. The FSS inspection found that Sin Bank violated the duty to explain by omitting some investment risks, had poor internal controls, and failed to keep investment solicitation documents.

In this case, the employee can receive a 40% compensation ratio due to sales company factors: 20% basic compensation for violation of the duty to explain under the old Capital Markets Act, plus 10 percentage points for poor internal controls, 5 percentage points for violation of the obligation to keep investment solicitation documents, and 5 percentage points for negligence of suitability principles. Considering investor factors such as first-time ELS investment (+5 percentage points) and being a non-profit public interest organization (+5 percentage points), the total compensation ratio is expected to be around 50%. If a loss of about 11 million KRW is confirmed, 5.5 million KRW can be recovered from Sin Bank.

⑩ An employee of a small enterprise who subscribed 200 million KRW to ELS on a bank employee’s recommendation

An employee of R Corporation, classified as a small enterprise under the Small and Medium Enterprise Act, visited a branch of Im (壬) Bank in January 2021 and was recommended an ELS product by a bank employee, subscribing for 200 million KRW for the first time. The maturity came due in January 2024, resulting in a loss. The FSS inspection found that Im Bank distorted some investment risks when explaining the ELS product, violating the duty to explain and having poor internal controls.

In this case, the employee can receive a 30% compensation ratio due to sales company factors: 20% basic compensation for violation of the duty to explain under the old Capital Markets Act, plus 10 percentage points for poor internal controls. Considering investor factors such as first-time ELS investment (+5 percentage points), subscription amount over 100 million KRW up to 200 million KRW (-7 percentage points), and financial product understanding ability (0 percentage points), the final compensation ratio is expected to be around 28%. If the loss is 100 million KRW, 28 million KRW can be recovered from Im Bank.