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Ruling on Hong Kong ELS losses deals blow to FSS's justification for record fines

Published: 26 Jan. 2026, 19:03 Updated: 26 Jan. 2026, 19:39

Members of the Hang Seng Index ELS victims' association hold a rally in front of the Financial Supervisory Service headquarters in Yeouido, western Seoul, on April 24, 2024. [YONHAP]

A court ruling that sided with a bank over losses tied to equity-linked securities (ELS) in Hong Kong's index has undermined the financial regulator's justification for impending fines.

By placing relatively broad responsibility on the investor in a damages suit over mis-selling, the court has increased the legal risks associated with the Financial Supervisory Service's (FSS) planned fines totaling around 2 trillion won ($1.39 billion).

The FSS will hold its second sanctions review meeting on Thursday regarding the mis-selling of Hang Seng Index ELS products, according to financial authorities on Sunday. The court’s ruling, which contradicts the regulator's core argument, is expected to heighten the legal controversy over the unprecedented fines.

The Seoul Central District Court on Jan. 16 ruled against a plaintiff who had filed a 1 billion won damages suit against a bank after suffering losses from investing in the Hong Kong ELS.

“The failure to provide 20 years of past index data and simulated return models does not constitute a breach of the duty to explain,” the court said. “It is fundamentally the investor’s responsibility to assess the potential for profit or losses based on future index fluctuations.” The court did not find the bank in violation of any obligation to provide information.

This clashes with the FSS’s stance, which has placed “failure to explain” at the center of its allegations regarding the mis-selling of Hong Kong ELS products.

Former Financial Supervisory Service Gov. Lee Bok-hyun speaks during a press conference announcing the dispute resolution standards related to large-scale losses in ELS linked to Hong Kong's Hang Seng Index at the agency's headquarters in Yeongdeungpo District, western Seoul, on March 11, 2024. [YONHAP]

The Hong Kong ELS crisis emerged in earnest in 2023 following a sharp drop in the Hang Seng. Amid low interest rates, banks sold 16.3 trillion won worth of these products starting in 2020. Losses amounted to roughly 4.6 trillion won.

Following an investigation, the FSS concluded that banks had failed to adequately explain the risks of loss. In late 2023, it notified KB Kookmin, Shinhan, Hana, NH Nonghyup and Standard Chartered banks of fines totaling about 2 trillion won.

Some investors responded by filing lawsuits seeking restitution and compensation for damages, but the court sided with the banks.

A total of 91.4 percent of investors who incurred losses had previous experience investing in ELS products, according to the FSS.

This undermines the FSS’s argument of “protecting inexperienced investors” and highlights the possibility that such rationale may face stricter scrutiny in administrative litigation, with the court ruling effectively arguing that relevant information is easily accessible to investors and that it is their responsibility to review it.

Members of the Hang Seng Index ELS victims' association condemn financial fraud in a rally in front of the KB Kookmin Bank headquarters in Yeouido, western Seoul, on March 29, 2024. [YONHAP]

The court also ruled that the obligation to provide index trend data and return simulations lies with the issuer — the securities firm — and not the bank that sold the product. This distinction is expected to become a new point of contention.

In other words, responsibility for explaining the product should not fall solely on banks, but should also include the issuer that designed the product structure.

Banks have emphasized that they have already paid over 1 trillion won in voluntary compensation to affected investors.

Former FSS Gov. Lee Bok-hyun stated last year that proactive compensation would be taken into consideration during the sanctions process.

As of June last year, banks had reached settlements with 96 percent of affected investors, and total compensation from the five banks had reached 1.34 trillion won.

Former Financial Services Commission Vice President Kim So-young speaks during a briefing on the status and countermeasures for the Hang Seng Index ELS issue at the government complex in Jongno District, central Seoul, on Feb. 26, 2025. [NEWS1]

However, with a shift in the government’s approach to financial penalties under a new administration, banks now argue that their early compensation efforts only increased their financial burden.

Financial authorities argue that the investor in the recent lawsuit is not representative of typical ELS victims. The plaintiff had invested in ELS products 13 times previously and put as much as 2 billion won on the line, distinguishing them from ordinary investors.

“This is different from cases where a person planning to deposit around 100 million won was persuaded by a bank to invest in ELS and then suffered losses,” an FSS official said.

The final amount of the fine will be determined following the sanctions review meeting and a decision by the Financial Services Commission, but controversy over the record 2 trillion won fine appears inevitable.

“It’s difficult for investors to win civil suits by proving a breach of the duty to provide information,” said Lee Min-hwan, a professor of global finance at Inha University. “But since the court issued a ruling that runs counter to the FSS’s position just before the sanctions review, the agency is likely to feel increased pressure to confirm fines at the originally notified level.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM DA-YOUNG [[email protected]]