FSS Issues Preliminary Notice to Five Banks
Largest Fine Ever Imposed
Heavier Burden on Banking Sector Performance
Productive Finance Initiatives Also at Risk
Last March, in front of the Federation of Banks Building in Jung-gu, Seoul, subscribers of the Hong Kong Index ELS held a press conference. Photo by Yonhap News
The Financial Supervisory Service has issued a preliminary notice to five banks, informing them of a combined fine and penalty totaling approximately 2 trillion won in connection with the mis-selling of equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index (Hong Kong H-Index). This is the first fine in the trillion-won range since the enactment of the Financial Consumer Protection Act in 2021, and it is also the largest fine ever imposed. If the fine is finalized at this scale, it is expected to inevitably impact the capital ratios of the banking sector.
2 Trillion Won Fine for Five Banks Selling Hong Kong ELS
According to the financial sector on November 28, the Financial Supervisory Service sent preliminary notices to each of the selling banks in accordance with the penalty regulations of the Financial Consumer Protection Act. KB Kookmin Bank, Shinhan Bank, Hana Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea were notified of fines and penalties. Woori Bank was also a distributor, but due to its smaller scale, it was not included in the preliminary notification.
The total amount of fines and penalties is reported to reach about 2 trillion won. The Financial Consumer Protection Act allows fines of up to 50% of the revenue or equivalent amount obtained through illegal acts by financial institutions. The Financial Supervisory Service is said to have calculated the fines based on the sales amounts.
Banks Face Burden from Increased Risk-Weighted Assets (RWA)
According to the financial sector, the sales amounts of Hong Kong ELS were 8.1972 trillion won for KB Kookmin Bank, 2.3701 trillion won for Shinhan Bank, 2.1310 trillion won for Nonghyup Bank, 2.1183 trillion won for Hana Bank, 1.2427 trillion won for Standard Chartered Bank Korea, and 41.3 billion won for Woori Bank. Based on a simple estimate, KB Kookmin Bank is expected to bear a burden in the 1 trillion won range, while Shinhan Bank, Hana Bank, and NH Nonghyup Bank are expected to face a burden in the mid-200 billion won range.
Banks are concerned about the increase in risk-weighted assets (RWA) that will occur after paying the fines. Typically, once a fine is finalized, banks are required to accumulate RWA at about six times the amount of the fine, which leads to a decrease in the Common Equity Tier 1 (CET1) capital ratio.
The banking sector believes this could also hinder the productive finance initiatives emphasized by the Lee Jaemyung administration. A senior bank official stated, "If RWA increases, it becomes more difficult for banks to make other loans," adding, "Due to the burden of operational risk, there could also be restrictions on corporate finance."
The Financial Supervisory Service will bring the case to the sanctions review committee on December 18 to begin the formal disciplinary process. The process includes preliminary notification, holding the sanctions review, adversarial proceedings, determination of the level of sanctions, and final notification. The final amount of fines will be confirmed by the Financial Services Commission.
Another bank official commented, "A 2 trillion won fine is a concerning amount, so we plan to submit a statement of opinion regarding a possible adjustment before the sanctions review," adding, "Even if the fine is reduced later, considering that we must set aside provisions in advance, it will inevitably impact our financial results."
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