[Hong Kong ELS Compensation] Compensation Up to 0% Depending on Investment Experience... Standard Plan Finalized

Compensation Ratios Likely to Vary Based on Investment Experience and Loss Occurrence

The financial supervisory authorities have released a draft dispute mediation standard (draft standard) related to the large-scale loss incident involving Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) based equity-linked securities (ELS). As before, a basic compensation ratio (20~40%) is set, with additional adjustment factors including the seller's weighting (3~10%), investor factors ±45 percentage points, and adjustment factors ±10 percentage points applied.

The factors are broadly divided into seller factors and investor factors. Since the seller factor ratio is determined for each bank or securities firm, the key element in deciding the individual investor's compensation ratio is the investor factor, which can vary by ±45 percentage points. Investment experience in ELS products (-2~-25%) and purchase (subscription amount) and profit scale (-5~-15%) are cited. Cases with no investment experience and clear evidence of mis-selling will receive a higher compensation ratio, but investors who had repeatedly invested in ELS products before this incident and realized significant profits are expected to have compensation ratios approaching 0%.

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On the morning of the 11th, the Financial Supervisory Service (FSS) held a press briefing at its headquarters in Yeouido, Seoul, unveiling the 'Hong Kong H Index ELS inspection results and dispute mediation standards (draft)'. In his opening remarks, Lee Bok-hyun, Governor of the FSS, said, "We regret that a large-scale investor loss incident has occurred again following past overseas interest rate-linked derivative-linked securities (DLF) and private fund incidents," adding, "Above all, we hope investors receive fair compensation to smoothly resolve disputes, and that this incident serves as a moment of reflection to prevent recurrence of similar cases."

◆ ELS Investment Experience and Loss Status Are Decisive = Accordingly, the draft standard is designed to comprehensively consider seller factors and investor-specific factors based on confirmed losses per investor. Seller factors include the basic compensation ratio (20~40%) and weighting (5~10%), while investor-specific factors include additional (+ up to 45 percentage points) and deduction (- up to 45 percentage points) elements, with other adjustments of ±10 percentage points applied.

The basic compensation ratio ranges from 20% to 40% depending on violations of sales principles such as suitability (appropriateness) principle, duty to explain, and prohibition of unfair solicitation. For the bank with the largest ELS sales volume, a uniform issue was found regarding suitability principle or duty to explain violations applicable to all investors, so a basic compensation ratio of 20~30% was set. For securities firms, no uniform issues were found, so compensation ratios of 20~40% are applied based on individual investor sales principle violations.

The weighting reflects responsibility for internal control deficiencies causing mis-selling, with banks assigned 10 percentage points and securities firms 5 percentage points depending on severity. However, for online sales channels, considering the relatively lower impact of internal control deficiencies, 5 percentage points for banks and 3 percentage points for securities firms are applied.

Investor-specific additional conditions include deposit/savings account subscription purpose (10 percentage points), financially vulnerable groups (5~15 percentage points), first-time ELS investors (5 percentage points), poor record-keeping and monitoring calls (5~10 percentage points), and non-profit public interest corporations (5 percentage points). For financially vulnerable groups, 5 percentage points apply to seniors (65 years and older), retirees, and housewives, while 10 percentage points apply to the very elderly (80 years and older) and those with communication disabilities. Additionally, 5 percentage points are added if elderly investor protection standards were not met.

The largest deduction factor is ELS investment experience (2~25%). For past ELS subscription counts, 21~30 times results in a 2 percentage point deduction, 31~40 times 5 percentage points, 41~50 times 7 percentage points, and over 51 times 10 percentage points. Additionally, based on ELS product understanding, 5 percentage points are deducted for delayed repayment experience, 10 percentage points for redemption experience, and 15 percentage points for loss experience.

Deductions also apply based on purchase and profit scale (5~15%). For ELS subscription amounts exceeding 50 million KRW up to 100 million KRW, 5 percentage points are deducted; for amounts over 100 million KRW up to 200 million KRW, 7 percentage points; and for amounts exceeding 200 million KRW, 10 percentage points are deducted. Furthermore, if cumulative profits from past ELS products exceed losses from the disputed ELS, an additional 10 percentage points are deducted. However, the deduction based on purchase and profit scale is capped at a maximum of 15%. Other deductions of 5~10 percentage points apply based on financial product understanding. For cases difficult to generalize or issues not covered in adjustment items, an additional ±10 percentage points of other adjustments are applied.

Thus, investor investment experience and purchase/profit scale have become key factors in determining compensation ratios. For example, a 50s investor with 62 past ELS investments and loss experience was found to have a 0% compensation ratio under the draft standard despite some recognized mis-selling. This contrasts with a 60s investor with no ELS investment experience who showed a 55% compensation ratio.

Governor Lee explained, "The draft is designed so that compensation ratios increase for financially vulnerable groups and customers wishing to subscribe to deposits/savings who were not properly protected, while compensation ratios decrease for customers with extensive ELS investment experience or high financial knowledge," adding, "It comprehensively reflects both seller and investor responsibilities."

◆ Consideration Given for Post-Incident Remedial Efforts = Meanwhile, the authorities plan to impose sanctions on institutions and employees, as well as fines and penalties, for illegal and unfair acts confirmed through on-site inspections. However, if sellers undertake customer damage compensation and correction of pointed-out issues as post-incident remedial efforts, consideration will be given according to relevant standards and procedures. Additionally, the FSS will begin dispute mediation procedures next month by holding dispute mediation committee meetings on representative damage cases.

Alongside this, improvements to the system related to the sale of high-risk financial products such as ELS will be pursued. Since large-scale mis-selling cases have emerged in ELS and similar products, which were exceptionally allowed during the 2019 ban on banks selling high-risk private funds and trusts, the authorities plan to review the scope of sales and reorganize the manufacturing and sales regulatory framework for financial investment products.

The FSS stated, "We will seek improvements to the sales system that can operate effectively by comprehensively considering sales behaviors at branch sales counters and consumer behavior patterns," adding, "After studying overseas cases and gathering expert opinions, we will find improvement measures that balance financial consumer protection and financial industry development."