South Korea's financial regulator on Wednesday imposed a record 374.6 billion won ($280 million) in penalties on seven banks and six securities firms for misselling Hong Kong-linked investment products, sharply reducing the fines from earlier proposals after considering investor compensation and legal factors.
The Financial Services Commission finalized the sanctions over violations of the Financial Consumer Protection Act involving equity-linked securities, or ELS, tied to the Hang Seng China Enterprises Index, commonly known in Korea as the Hong Kong H Index.
The products, whose returns depend on the performance of underlying assets, caused heavy losses for investors when the index plunged.
KB Kookmin Bank was assessed the largest fine at 172.3 billion won, followed by Hana Bank at 92.5 billion won, NH NongHyup Bank at 40.2 billion won and Shinhan Bank at 38.7 billion won. Standard Chartered Bank Korea was fined 17.9 billion won and Woori Bank 331 million won. Suhyup Bank received an administrative penalty of 42 million won.
The bank fines were cut from about 600 billion won recalculated by the Financial Supervisory Service in June, following an earlier proposal of over 1 trillion won.
An FSC division director in charge of the case said the reductions reflected various factions, including court rulings in ELS-related civil cases, the rationale for an initial enforcement grace period under the consumer protection law and provisions allowing reductions based on investor compensation.
"The law allows the extent of compensation to be taken into account, so we adjusted the fines accordingly," the official said.
The FSC found that banks failed to adequately explain investment risks and, in some cases, determine whether the products were suitable for customers.
Product documents omitted historical return simulations or altered the periods they covered, leaving out information material to investment decisions. Some banks also oversimplified how gains and losses were determined and failed to explain risks from movements in underlying asset prices. Others recommended and sold products without considering customers' financial circumstances when assessing their investment profiles.
The six securities firms received a combined 10.9 billion won in fines and administrative penalties. Korea Investment & Securities accounted for most of the brokerage fines, at about 9.2 billion won.
The FSC said it reviewed the facts and legal issues over several rounds of deliberations, describing the case as "the first case involving violations of the consumer protection law by major financial institutions and affecting a large number of consumers."
Banks could challenge the penalties in administrative court, though industry sentiment points toward acceptance given the substantial reductions and concern that contesting sanctions for consumer protection violations could trigger public backlash.
jwc@heraldcorp.com
