[Hong Kong ELS Compensation] "Immediate Compensation Upon Customer-Financial Institution Agreement"

Q&A Materials Related to the Financial Supervisory Service Adjustment Plan

The Financial Supervisory Service (FSS) has released a dispute mediation guideline (mediation guideline) related to the large-scale loss incident involving Hong Kong H-Index (Hang Seng China Enterprises Index·HSCEI) based equity-linked securities (ELS). Following the announcement of the mediation guideline, voluntary compensation and sanction procedures by sales firms are expected to commence. However, the timing of compensation will vary depending on whether there is mutual agreement between subscribers and sales firms.

Below is a Q&A from the FSS regarding the ELS inspection results and the mediation guideline.

- When can financial consumers who suffered losses from ELS investments expect to receive compensation?

▲ If sales firms voluntarily compensate (private settlement) according to the mediation guideline, the timing of compensation will be determined based on mutual agreement and timing between the parties. Voluntary compensation by sales firms is expected to minimize socio-economic costs arising from prolonged legal disputes.

- What is the average compensation ratio per consumer? What is the total amount to be compensated by banks and securities firms respectively?

▲ The compensation ratio for individual investors will be calculated based on the mediation guideline. The mediation guideline serves as the starting point for dispute mediation procedures, so it is difficult to uniformly specify the exact compensation ratio per investor at this time. This is because violations differ by sales firm and period, and losses have not yet been finalized.

- Is it possible that some subscribers receive 100% compensation while others receive 0%?

▲ Based on the mediation guideline, the responsibility of sales firms and investors will be comprehensively considered to determine compensation. In some cases, such as disputes over the invalidity or cancellation of legal acts, only one party’s responsibility may be recognized.

- Are past profits obtained from previous ELS products offset against the compensation amount?

▲ Past investment experience and profit scale of investors are among the factors considered when assessing investor responsibility. However, past profits are not directly offset against the compensation amount.

- How is compensation handled if the loss is not yet finalized due to remaining maturity?

▲ Compensation amounts will be determined based on losses confirmed after maturity for each investor.

- What if some consumers are not satisfied with the mediation guideline?

▲ The mediation guideline was designed as objectively as possible by referencing past dispute cases while comprehensively considering the uniqueness of this incident and sales channels. Please understand that it is a rational standard aimed at reducing social costs caused by large-scale lawsuits and enabling consumers to recover losses quickly. Consumers who dispute the mediation guideline can assert their rights through litigation procedures.

- What is the schedule for future proceedings such as holding representative case dispute mediation committees?

▲ The process typically takes about 2 to 3 months and includes additional fact-finding and review → referral to the Dispute Mediation Committee → notification of mediation decision (to both parties) → acceptance or rejection by the parties → mediation establishment if both parties accept.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is announcing the dispute mediation guidelines related to the large-scale losses of Hong Kong H Index-linked ELS at the Financial Supervisory Service in Yeouido, Seoul on the 11th. Photo by Kang Jin-hyung aymsdream@

- How does the compensation standard differ compared to the past overseas interest rate-linked derivative-linked fund (DLF) incident?

▲ The differences in ELS product characteristics and changes in consumer protection environments compared to DLF were taken into account. DLFs are atypical and have very complex product structures that are difficult for the general public to understand. In contrast, ELS, which have been sold over a long period, are relatively popularized products with standardized structures, distinguishing them from DLFs. Additionally, after the DLF incident, sales regulations were strengthened through laws such as the Financial Consumer Protection Act, so formal sales procedures by sales firms are generally in place.

- What is the expected level of sanctions against sales firms and the future schedule?

▲ The inspection results will be promptly organized, and sanction procedures will be initiated swiftly. The specific scope and level of sanctions, such as CEO sanctions and fines, will be determined later according to relevant laws and procedures. Efforts for post-incident recovery, including consumer damage compensation, may be considered when determining the severity of sanctions.

- The mediation guideline includes responsibility for internal control deficiencies such as inadequate consumer protection management systems. Will sanctions for internal control deficiencies proceed in the future?

▲ Since the mediation guideline is an objective standard to assist voluntary agreements between parties, the question of legal sanctions will be separately reviewed according to relevant laws. Whether sanctions related to internal control deficiencies will proceed will be handled through relevant procedures considering applicable laws, court rulings, and established sanction standards.

- What is the specific scale of incomplete sales?

▲ Different laws apply depending on the violation period, and the specific sales scale by suspected violation type per sales firm must be confirmed. Since inspections of individual sales cases have not yet been completed, it is difficult to finalize the exact scale of violations.

- Are there plans to inspect other sales firms?

▲ Considering the progress of handling inspection results for major sales firms, future inspection decisions and schedules will be reviewed. However, the mediation guideline announced this time can also be applied equally to other sales firms that have not been inspected.

- What is the expected scale of loss burden on banks due to the mediation guideline? How will it affect bank soundness?

▲ It is currently difficult to definitively predict the scale of loss burden on banks. However, as of the end of last year (provisional), the common equity tier 1 capital ratio of domestic commercial banks was 14.05%, significantly exceeding the regulatory ratio (8%), and profitability remains solid, so the impact of dispute mediation is expected to be limited.