KB, Shinhan to issue compensation for HK-linked ELS losses

Investors of the troubled Hong Kong-tied derivative products demand full compensation for their losses in a protest held in central Seoul on March 15, 2024. [YONHAP]

KB Kookmin and Shinhan banks will push ahead with voluntary compensation for losses suffered by traders of troubled Hong Kong-tied derivative products.

The two largest commercial banks in Korea made the announcement following their respective board meetings on Friday, during which they agreed to follow the guideline set forth by the Financial Supervisory Service (FSS) in March.

“We will quickly issue compensation in the order of cases for which losses have been confirmed,” said KB Kookmin Bank in a statement.

KB Kookmin Bank sold more than 7 trillion won ($5.3 billion) worth of the equity-linked securities (ELS) connected to the Hang Seng China Enterprises Index (HSCEI). KB Kookmin was by far the largest seller of the products, followed by Shinhan Bank at 2.4 trillion won in sales.

ELS returns are linked to the upward and downward movement of the underlying stocks.

“We plan to contact customers from April and relay the details and procedure,” said Shinhan Bank on the day. “We intend to distribute compensation in the order of agreement on the compensation ratio.”

The financial regulator had warned of action against the sellers of the products, which caused 1.2 trillion won in losses in the first two months of this year as the index lost around half of its value from the 2021 peak.

The financial watchdog estimates an additional loss of 4.6 trillion won this year if the index remains largely unchanged from the current level.

Their sales became controversial as losses mounted and many investors of the products were elderly people. The FSS criticized the sellers, which also included brokerage firms, for misrepresenting the risks of the products.

Other sellers of the products also include Hana and Woori banks as well as the Standard Chartered Bank Korea, all of which agreed to remit compensation based on the FSS guideline.

Hana Bank said on Friday that it paid its first compensation for the losses of the HSCEI-linked ELS.

The basic compensation ratio set by the FSS stands between 20 to 40 percent based on multiple assessment criteria, including an adequate explanation to the investors and the existence of an internal control system at the selling institutions and the characteristics of the traders, like their previous experience in ELS investment.

A slew of banks suspended the sales of all types of ELS following the controversy, starting with NongHyup last October. It was followed by KB Kookmin and Hana banks in January, raising concerns for the Nikkei 225, which reached a record high this year.

BY JIN MIN-JI [jin.minji@joongang.co.kr]