[Hong Kong ELS Compensation] Bank vs Subscriber Round 2... Will It Lead to Litigation?

Subscribers to Hold Relay Protests from the 15th with 'Strong Response'
Banks Review Legal Grounds... Possibility of Accepting Settlement Proposal
Some View 'Law Firms' as the Ultimate Winners

[Image source=Yonhap News]

The financial authorities have released a dispute mediation guideline (mediation plan) related to the large-scale loss incident involving Hong Kong H Index (Hang Seng China Enterprises Index·HSCEI) based equity-linked securities (ELS), sparking a second round of conflict between banks and product subscribers over the compensation ratio issue.

Subscriber groups plan to hold a series of large-scale off-site rallies against major banks, while the banks have begun estimating compensation amounts and conducting legal reviews through task forces (TF) and law firms. Some express concerns that this incident may ultimately escalate into court litigation. However, the industry generally believes that major banks are likely to accept the mediation plan considering the enormous social costs involved.

According to the financial sector on the 13th, subscribers are showing a tough stance, announcing a relay rally starting from the NH Nonghyup Bank headquarters on the 15th. They argue that the seller’s fault application ratio proposed in the mediation plan is significantly low. Subscribers claim that banks deliberately concealed the risks and falsely assured that there would be no losses when selling the products. Gil Seong-ju, chairman of the Hong Kong ELS Victims Association, said in a phone interview, "While people with dozens of subscription experiences should be filtered out, even those who were persuaded when going to open savings accounts are included, which is unfair," adding, "Now that the baton has been passed, we will wage war against the banks."

The banking sector is refraining from public statements and instead reviewing the total compensation scale and related legal issues through internal meetings and discussions with major law firms. Currently, it is estimated within and outside the industry that the average compensation ratio for voluntary compensation will reach about 30%. The corresponding compensation amount is expected to be in the range of 1 to 2 trillion won.

However, banks also have considerable points to argue. They believe there are many disputable aspects that should be contested before voluntarily compensating without legal judgment on incomplete sales. Factors such as the product being a common one with about 400,000 subscription accounts through public funds, and unlike the past overseas interest rate-linked derivative-linked securities (DLF) incident, there being no structural problems with the product, contribute to banks’ dissatisfaction with the application of the basic compensation ratio.

For this reason, some suggest that a prolonged litigation battle may ensue. ELS subscribers demanding "full compensation" are not satisfied with the basic compensation ratio of 20-40%, and banks are reluctant to voluntarily compensate without a legal conclusion on incomplete sales, as this could lead to issues of breach of fiduciary duty for management and the board of directors. A financial sector official explained, "The foreign ownership ratio of the four major financial holding companies is in the 60-70% range, and they are particularly sensitive to dividends," adding, "If huge compensation payments are made, the dividend capacity could decrease accordingly, and voluntary compensation without legal grounds is likely to be regarded as a breach of fiduciary duty."

However, the industry expects that banks will have no choice but to accept the mediation plan. A banking sector official said, "Although the mediation plan is unsatisfactory, it is true that conducting individual lawsuits with tens of thousands of subscribers would require considerable time and cost," adding, "Since the authorities are also offering a kind of 'carrot' such as sanctions and penalty reductions, ultimately, it will be impossible not to accept it." Another banking sector official said, "In this atmosphere, it is not easy for banks, which are licensed businesses, to reject the compensation plan," and "The breach of fiduciary duty issue will likely be resolved somehow."

There is also a view that lawsuits by ELS subscribers may not be very practical. An official from the authorities said, "Since the enforcement of the Financial Consumer Protection Act (FCPA), banks have been required to document and record various transactions, and as a result, it is likely to be disadvantageous for individuals who must prove the seller’s illegalities in court," adding, "Looking at precedents such as the overseas interest rate-linked DLF incident, the proportion of cases going to litigation was not high, and the outcomes were not positive."

As the incident enters the second round, there is even a somewhat ironic comment that the biggest beneficiaries are large law firms. Major banks have already signed contracts worth tens of billions of won with leading law firms. Some banks have even appointed two law firms simultaneously. An official from the authorities said, "In this fight, the ones who will ultimately laugh are the law firms," adding, "They will earn hundreds of billions of won in revenue."