Policies should root out incomplete ELS sales

The Financial Supervisory Service announced plans for dispute resolution in relation to losses inflicted on investors by Hong Kong H-index underlying stock-linked securities (ELS), which is expected to result in an investment loss nearing six trillion won. The financial regulator confirmed excessive performance competition and incomplete sales practices, suggesting the possibility of providing full compensation for investment losses. On the other hand, compensation may not be available at all, considering ELS investment experience, etc. The compensation plan will be provided differently depending on specific circumstances, unlike previous compensation packages in which a lump sum was provided to all.

ELS products are high-risk investment products where loss risk can be 100%, and the primary responsibility lies in the investor. However, brokers such as banks and securities companies should not be exempt from the responsibility of increasing the damage. When the Financial Supervisory Service conducted on-site inspections of eleven brokers over a two-month period, numerous cases of incomplete sales were revealed. A bank was found to have encouraged company-wide sales activities by raising its commission target to more than 50% compared to the previous year. Those with ELS sales performance were rewarded, encouraging competition among employees. Some brokers ignored internal regulations to reduce sales limits during high stock index volatility and increased sales.

High-risk financial products had been sold indiscriminately, even targeting financially vulnerable groups with little investment experience. One bank did not provide accurate background on ELS to an investor in his 80s with hearing disabilities. They signed applications on behalf of customers who did not make in-person visits to the bank while forging employees to act like customers and making false recordings. In some cases, they coaxed customers to sign up falsely, explaining that ESL was a safe investment product without losing principal or by falsifying documents.

Financial authorities are also responsible. They belatedly responded only after the damage was done, despite previous similar cases, such as the interest rate-linked derivative-linked fund (DLF) loss in 2019 and the Lime/Optimus case in 2020. After the DLF case, they banned the sale of high-risk products by banks but relaxed regulations on index-type ELS at the request of banks while neglecting supervision.

Compensation for losses and punishing those responsible is critical, but reforming the system to prevent such incidents from recurring is most important. Aligning the interests of banks and customers by charging fees when investor profits are generated rather than when products are sold may be an option. Limiting employee bonuses in the event of loss and restricting banks' sales of high-risk financial products could also be considered. The risks of derivatives and the inventor being responsible for their actions must also be clarified. We should no longer tolerate damage caused by the greed of financial companies.