Regulator finalizes 370 bln-won penalties on banks, securities firms over mis-selling of HK-tied derivatives

South Korea’s financial regulator finalized penalties totaling 370 billion won against seven banks and six securities firms. The action concerned the mis-selling of equity-linked securities, or ELS, tied to Hong Kong’s H Index. It matters because customers bought products whose risks and contract details were not fully explained.

The seven banks received 361 billion won in penalties. KB Kookmin Bank received the largest amount, 173 billion won. Hana Bank was fined 92.4 billion won, while NH Nonghyup received 40.1 billion won. The article also names Shinhan Bank and SC Korea among the affected lenders.

The final amount was sharply lower than the initial 1.4 trillion-won penalty proposed for five lenders. The Financial Services Commission ordered another review of legal issues before finalizing the penalties. Banks and brokerages had sold 19.3 trillion won of the Hong Kong-linked ELS products since 2021.

Banks and brokerages sold 19.3 trillion won of ELS products tied to Hong Kong’s H Index since 2021. Against that sales volume, the finalized 370 billion-won penalties were relatively small in percentage terms. They represented about 1.9% of the total products sold.

The calculation compares 370 billion won with 19,300 billion won. That means the sales volume was roughly 52 times the size of the penalties. The seven banks’ share of the penalties was 361 billion won, or about 1.9% as well. These figures measure different things: sales show the products’ total value, while penalties punish alleged mis-selling.

The comparison also shows the broad reach of the episode. KB Kookmin Bank alone sold 8.2 trillion won of the products, the largest amount among the banks listed. The financial regulator also ordered banks to compensate customers for part of their losses.

An equity-linked security, or ELS, is a hybrid financial security. Its return is connected to the performance of an underlying equity or stock index. The product does not simply pay a fixed amount regardless of market conditions. Instead, the result depends partly on how the chosen underlying asset performs.

For the products in this case, the underlying measure was Hong Kong’s H Index. If the index met the product’s required performance conditions, investors could receive the return specified in the contract. If the index fell sharply, the contract’s result could worsen. The exact outcome depended on each product’s terms, which regulators said customers did not always receive sufficient information about.

This link explains why the products carried market risk. Buyers were exposed to movements in the underlying index, rather than being insulated from them. The episode became significant after the H Index plunged in early 2024, causing massive losses for buyers of the Hong Kong-linked ELS products.

The Hong Kong-linked ELS products connected investors’ returns to the H Index. When that index plunged in early 2024, the market condition supporting the products weakened sharply. Because ELS results depend on an underlying equity or index, investors could lose money when that reference measure fell.

The key mechanism was the contract’s linkage to the index. The products were not independent of market performance. Their returns were determined by terms that used the H Index as an underlying measure. A sharp decline could therefore reduce the amount investors received or create losses, depending on the individual contract. The article does not provide each product’s exact formula.

The losses became especially serious because the products had been sold widely. Banks and brokerages sold 19.3 trillion won of them since 2021. Regulators said banks failed to provide all necessary information about contract terms and associated risks, and ordered them to compensate customers for part of the losses.

The regulator said banks did not provide consumers with all necessary information before selling the Hong Kong-linked ELS products. The missing information included the products’ contract terms and the risks associated with them. This mattered because those terms determined how changes in the H Index could affect investors’ returns.

An ELS is linked to an underlying equity or index, so customers need to understand how that link works. They also need to know what could happen if the index falls. In this case, Hong Kong’s H Index plunged in early 2024, and buyers suffered massive losses. The article does not list every omitted disclosure or explain each contract’s formula.

The regulator treated the information failure as mis-selling. It ordered banks to compensate customers for part of the losses incurred. It also finalized penalties against seven banks and six securities firms, with total penalties of 370 billion won. The banks’ finalized share was 361 billion won.

The final penalties were much lower than the initial amounts. The first figure was a 1.4 trillion-won penalty on five lenders, while the Financial Supervisory Service later proposed 600 billion won on the banks. The Financial Services Commission ultimately finalized 370 billion won across seven banks and six securities firms.

The article identifies a further review of legal issues as the direct reason for the regulatory reconsideration. It also notes that the five lenders had already suffered massive losses because they compensated customers over the mis-selling. That compensation did not erase the penalties, but it formed important financial context for the lenders.

The final decision imposed 361 billion won on the seven lenders. KB Kookmin Bank received the largest bank penalty, at 173 billion won, followed by Hana Bank at 92.4 billion won and NH Nonghyup at 40.1 billion won. The article does not detail every legal issue reviewed.

Derivatives and other complex products connect payments to an underlying asset, index, or market measure. That structure means investors, rather than only the issuing institution, bear some of the risk of market movements. The product’s contract sets the conditions for gains and losses. This explanation uses established financial knowledge; the article specifically describes ELS as linked to underlying equities and indexes.

In the case reported, the products tracked Hong Kong’s H Index. When the index plunged in early 2024, buyers suffered massive losses. A sharp fall can trigger unfavorable payment terms, reduce the expected return, or expose investors to losses, depending on the contract. The article does not give the exact formulas for each product.

Risk can become large when a product is sold widely or when customers do not receive clear information. Banks and brokerages sold 19.3 trillion won of these ELS products. Regulators said banks failed to explain contract terms and associated risks, then ordered partial compensation and imposed penalties.