Hongkong ELS to provide differential compensations

Equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI), which recorded sales of approximately 20 trillion won until last year, are estimated to incur a loss of six trillion won. The Financial Supervisory Service (FSS) identified mis-selling by banks and securities firms and suggested criteria for voluntary compensation.

“Some ELS sellers did not manage the maximum amount to be sold to each customer and even encouraged further sales when customers’ risk of loss increased, which led to mis-selling,” Lee Bok-hyun, the chair of the FSS, said announcing the dispute conciliation criteria on Monday. Based on the recent investigation, the financial authorities will reexamine the system of banks selling high-risk products from square one.

The FSS did not set out the upper and lower limits for the compensation ratio as it did before. Instead, the organization categorized plus and minus factors for each seller and investor. The possibility of not receiving any compensation or receiving compensation for 100 percent of investment losses remains open. The compensation criteria announced by the financial authorities are non-binding recommendations to financial companies. Therefore, failure to reach an agreement between sellers and investors may lead to lawsuits and other legal disputes.

Some point out that the financial authorities should also be held responsible for neglecting banks’ senseless sales of high-risk products. “Separate measures, including careful post-sales management for high-risk products, should be put in place,” said Professor Seo Ji-yong of Business Administration at Sangmyung University.


강우석 기자 wskang@donga.com