South Korean banks and securities firms were found to have engaged in mis-selling in the sale of Hong Kong H-index equity-linked securities (ELS), without explaining the risks of the products and soliciting older investors, according to a financial regulator inspection. The regulator also found that sellers including five banks and six securities firms systematically engaged in mis-selling to meet sales targets or performance indicators.
The Financial Supervisory Service (FSS) has recently published the “Hong Kong H Index ELS Inspection Results and Dispute Settlement Guidelines” on Mar. 11, 2021. Lee Bok-hyun, the governor of FSS, stated “Some ELS sellers encouraged incomplete sales by failing to manage sales limits even when the risk of customer loss increased, or by using KPIs to incentivize sales.” “As a result, the product sales regime was not in line with the principles and various types of incomplete sales occurred during individual sales,” he added. FSS has also proposed a standard for dispute settlement, in which the seller will compensate from 0 to 100 percent of the losses, taking into account the seller’s responsibility as well as the investor’s responsibility. It is estimated that the actual percentage of compensation will likely be between 20 and 60 percent.
ELSs based on the Hong Kong H-index are financial products that offer returns based on the rising and falling of the Hong Kong H-index. As of the end of Dec. 2023, the total balance of ELS sales in Hong Kong was $14.4 billion (18.8 trillion won), according to the FSS. Among the total sales, banks accounted for $11.7 billion (15.4 trillion won), while individuals (390,000 accounts) accounted for $13.1 billion (17.3 trillion won). Between January and February this year, $1.6 billion (2.2 trillion won) matured, out of which $0.9 billion (1.2 trillion won) was lost, resulting in a cumulative loss rate of 54%.
FSS conducted on-site inspections of 11 major distributors of (ELS) in Hong Kong (five banks and six securities firms). The inspections were carried out over a two-month period starting in January. The FSS found that consumer protection management was generally poor and incomplete in most cases. Many sales practices were found to be predatory, targeting financially vulnerable groups such as the elderly who wanted to “safety of principal” or “invest for less than a year.”
