'ELS That Made Investors Cry'... Cannot Be Sold at Just Any Bank

Financial Authorities Announce Measures to Prevent Incomplete Sales of High-Risk Investment Products
Equity-Linked Securities (ELS) to Be Sold Only at Designated Bank Branches
Sales Likely Limited to a Few Large Branches

Kim So-young, Vice Chairman of the Financial Services Commission, is briefing on the status and measures of Hong Kong H-Index based ELS at the joint briefing room of the Government Seoul Office in Jongno-gu, Seoul, on the morning of the 26th. Photo by Financial Services Commission.

Going forward, high-risk financial investment products such as Hong Kong equity-linked securities (ELS) will only be sold through bank branch offices equipped with consumer protection measures. It is expected that only about 5-10% of large branches among all bank branches will be able to sell ELS.

On the 26th, the Financial Services Commission announced a "Comprehensive Plan to Prevent Incomplete Sales of High-Risk Financial Investment Products," stating that banks will be required to sell ELS only through certain large branches that have sufficient consumer protection measures in place. Banks are expected to resume sales after conducting internal inspections by September.

Designated branches authorized to sell ELS must have physically separated spaces within the branch, such as separate entrances or floor separation, to distinguish the sales area from other parts of the branch. ELS can only be sold by dedicated sales staff who meet qualification requirements under relevant regulations (such as completion of related training and possession of certifications) and have a certain period of product sales experience (e.g., more than three years).

Kim So-young, Vice Chairman of the Financial Services Commission, said, "There are about 3,900 branches of the five major banks, and it is expected that about 5-10% of them will become designated branches."

The Financial Services Commission's regulation of banks' ELS sales was prompted by incomplete sales of ELS based on the Hong Kong H Index (Hang Seng Index), which caused many investors to suffer losses early last year. Banks sold a large number of ELS products based on the H Index when the Hong Kong H Index hit record highs in 2021. However, problems arose when the Hong Kong H Index plummeted in 2024, resulting in massive losses for investors. The financial authorities determined that banks had incompletely sold the high-risk product ELS to consumers without properly disclosing the risks and decided on partial compensation.

Kim So-young, Vice Chairman of the Financial Services Commission, is briefing on the status and measures of Hong Kong H-Index based ELS at the Joint Briefing Room of the Government Seoul Office in Jongno-gu, Seoul, on the morning of the 26th. Photo by Financial Services Commission.

The Financial Supervisory Service explained that, based on on-site inspections of sales agencies, most bank branches did not strictly separate the sales counters for high-risk financial investment products and deposit products, which led many bank customers to mistakenly perceive high-risk financial investment products as principal-guaranteed products.

It emphasized that the risk of high-risk financial investment products was not properly explained due to sales practices that prioritized sales performance over compliance with sales regulations. It pointed out that internal controls that could effectively prevent incomplete sales, such as performance reward systems and sales limit management, were not established, and that consumer protection was insufficiently enforced in actual sales sites, resulting in widespread push-selling of high-risk investment products like ELS.

The Financial Services Commission also decided to improve sales channels for other high-risk financial investment products (high-risk public funds). These products can be sold at both general branches and designated branches, but clear identification measures must be in place so that consumers can clearly distinguish them from deposits and savings products, and sales counters must be separated from general deposit and loan counters. The same sales channel requirements will apply to bank-securities combined branches jointly operated by banks and securities firms within the same group. Within combined branches, bank employees will only be allowed to sell high-risk financial investment products at investment counters separated from general deposit and loan counters.

The Financial Services Commission requires financial companies to specifically define target customer groups for each product and to refrain from soliciting investments from consumers who do not fall into these groups. If a consumer with an investment profile unsuitable for high-risk financial investment products still wishes to subscribe, the consumer must clearly and specifically acknowledge that the product is inappropriate or unsuitable before contracting, and financial companies must prepare documentation proving that no investment solicitation was made to the consumer.

Vice Chairman Kim emphasized, "Banks need to raise basic awareness that consumers must be protected during sales, and existing sales practices need to be improved. Banks themselves need to change the existing culture and practices regarding incomplete sales and internal controls."