Financial Committee, Hong Kong H Index ELS sanctions level decision or delay possibility... Banking sector tense

The final determination of fines related to the Hong Kong H-shares index-linked securities sales misconduct may be further delayed. This is because financial authorities are cautious in balancing strict sanctions to protect consumers against the broader impact on the entire financial sector.

On the 19th, according to financial authorities, the Financial Committee is reviewing whether to include sanctions cases involving the stock price-linked securities of five banks—Kookmin Bank, Shinhan Bank, Hana Bank, NongHyup Bank, and SC First Bank—on the agenda for this month’s regular meeting on the 29th. However, due to internal assessments that further legal interpretation and factual verification are needed, observers inside and outside the financial sector believe it will be difficult to reach a final conclusion within this month. After the Hong Kong H-shares index plummeted, causing large-scale losses, a core point of controversy has been whether the investment risks were adequately explained during the sales process.

The main discussion revolves around the scope of fine reductions. The Financial Supervisory Service initially calculated the fines to be about 4 trillion won, then halved them to approximately 2 trillion won, and pre-notified the banking sector in November last year. Subsequently, in February this year, a sanction of about 1.4 trillion won was approved and submitted to the Financial Committee. Under the revised Financial Consumer Protection Act last year, the Financial Committee can reflect factors such as efforts to provide remedies for damages, potentially reducing fines by up to 75%. Market predictions suggest that, based on the current proposed 1.4 trillion won, further reductions of over 30% could be possible, bringing the fines down to a few hundred billion won.

The concerns of the Financial Committee are also deepened by recent consecutive defeats in related sanctions lawsuits. The Financial Information Analysis Institute lost in the first trial of a three-month suspension of certain business operations filed by Dunamu, and the Committee also lost in a lawsuit seeking the cancellation of the suspension of former KB Securities President Park Jung-rim’s employment termination related to the Lime incident. To avoid further societal criticism over excessive sanctions, authorities are under pressure to design a nuanced sanctioning scheme that can withstand judicial scrutiny. At the same time, if such hefty fines weaken the capital strength of banks, government productive financial policies based on private financial institutions’ participation could also lose effectiveness, adding another variable.

However, significantly reducing fines by the Financial Committee is not easy. Since this sanctions case involves the first trillion-won-level fine since the enactment of the Financial Consumer Protection Act in 2021, it carries major symbolic significance and could set a precedent for how large-scale misconduct sales are sanctioned in the future. Recently, the Committee has reformed capital regulation, shortening the period during which sanctioned banks are at a disadvantage in capital oversight from 10 years to 3 years, easing some burdens. Nonetheless, banking industry insiders believe that even if fines are reduced from trillions of won to hundreds of billions, legal responses citing shareholder losses and suspected misconduct are still quite possible. This trend may lead future financial authorities to carefully balance consumer protection principles with the predictability of sanctions and litigation risks, thereby more precisely adjusting operational frameworks.