South Korea’s Financial Supervisory Service Mediating Disputes Over Hong Kong-Tied Equity-Linked Security Losses
By Michele Kallo
Since January 8, 2024, South Korea’s financial regulator, Financial Supervisory Service (FSS), has investigated major Korean banks for selling high-risk equity-linked securities (ELS) products linked to Hong Kong’s Hang Seng China Enterprises Index (HSCEI), which resulted in substantial financial losses among South Korean investors.[1] An ELS is a derivative product that promises returns if the underlying asset—in this case, the HSCEI—stays above a specified “knock-in” level until it matures.[2] Due to the severe decline in the HSCEI, many ELS products have seen drastic devaluations, leading to significant losses for investors, including those who are risk averse.[3] Investors aged 65 and older invested in over 5.4 trillion won in these products, and 8.6 percent were first-time ELS investors.[4] Many of these products were marketed without adequate risk disclosure, resulting in potential losses of up to $14.2 billion.[5] The potential losses from these ELS sales could have reached up to $14.2 billion, or 5.8 trillion won, if redeemed at end-February values.[6] With 80% of these products maturing this year amid a sharp HSCEI decline, investors are now seeking compensation.[7]
The FSS proposed a compensation plan to address mis-selling, offering a 20-40% basic compensation, plus an extra 10% for banks and firms lacking internal controls.[8] Gil Sung-ju, chairman of the Hong Kong ELS Victims’ Association, criticized this plan as favoring banks over victims.[9] He warned that if the compensation fails to meet investors’ expectations, the association will seek collective dispute resolution or pursue a class action lawsuit.[10]
As a result, the FSS has had the quasi-judicial Financial Disputes Mediation Committee (FDMC) mediate these disputes.[11] Although court settlements are an option, the FDMC's mediation process has clear benefits. Compared to drawn-out litigation, mediation offers investors a faster and more affordable means of pursuing compensation.[12] In contrast to court decisions, mediation enables cooperative solutions that consider the specific facts of each case, such as the investor's understanding of the transaction details.[13] Even though the FDMC provides out-of-court dispute resolution, their settlement proposals, when agreed to, “have the same effect as a judicial compromise,” that is, an in-court settlement.[14] Parties in South Korea can seek out-of-court or in-court settlements, which would both be recorded by the court and fully enforceable, and “unless there is a statutory ground for a retrial, such settlement protocol cannot be revoked or set aside.”[15] The FDMC has commonly settled disputes by issuing compensation ratio recommendations based on transaction details and investor sophistication.[16] Here, the recommendations have ranged from 30 percent to 65 percent.”[17] Given ELS's popularity and lack of clear structural issues, higher recovery through litigation would be unlikely “without undeniable evidence of mis-selling.”[18] Even though compensation has fallen short of inventors’ expectations, litigators have commended the FDMC's focus on consumer protection and providing investors with a fair chance to recoup losses without the burden of legal processes.[19]
Mediation presents a valuable option for addressing disputes related to the mis-selling of Hong Kong-tied ELS. It offers a faster and more cost-effective means for investors to seek compensation without the lengthy processes associated with litigation. The FDMC facilitates dialogue between parties, encouraging collaborative solutions that can lead to mutually agreeable outcomes. By focusing on the specific circumstances of each case, mediation enhances consumer protection and promotes a more equitable resolution process in financial disputes.
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[1] Lee Yeon-woo, Major banks prepare for dispute mediation over Hang Seng-tied ELS losses, Korea Times (Apr. 1, 2024), https://www.koreatimes.co.kr/www/biz/2024/10/602_371830.html [https://perma.cc/9FDP-SKPE].
[2] Kim Bo-yeon & Lee Jae-eun, HK-tied ELS investors demand fair compensation, threaten class action, The Chosun Daily (Mar. 14, 2024), https://www.chosun.com/english/market-money en/2024/03/14/6BVAMDFEUZEXVHBDK6P3DFUFOM/ [https://perma.cc/YU7M-VRAD].
[3] Id.
[4] Lee Yeon-woo, Financial firms to face severe consequences if mismanagement detected, Korea Times (Jan. 7, 2024), https://www.koreatimes.co.kr/www/biz/2024/10/602_366468.html [https://perma.cc/LTK8-J5VC].
[5] Id.
[6] South Korea’s financial regulator urges compensation for stock derivative losses, KoreaPro (Mar. 12, 2024), https://koreapro.org/2024/03/south-koreas-financial-regulator-urges-compensation-for-stock-derivative-losses/#:~:text=The%20Financial%20Supervisory%20Service%20 [https://perma.cc/5AWX-FBLM].
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Financial Dispute Mediation Committee, Fin. Supervisory Serv., https://www.fss.or.kr/eng/main/contents.do?menuNo=400022 [https://perma.cc/A69C-JFLY] (last visited Nov. 1, 2024).
[12] Bo-yeon & Jae-eun, supra note 2.
[13] Id.
[14] Act on the Establishment, etc. of Financial Services art. 55 (S. Kor.), translated in Korea Legislation Research Institute online database, http://elaw.klri.re.kr/eng_service/main.do (search required).
[15] Jun Yeong Chung et al., South Korea: Law and Practice, Chambers (Dec. 5, 2023), https://practiceguides.chambers.com/practice-guides/litigation-2024/south-korea [https://perma.cc/JPY2-JL82].
[16] The FSS Financial Dispute Mediation Committee Recommends Compensation for KIKO Damages, Kim & Chang (Jan. 2, 2020), https://www.kimchang.com/en/insights/detail.kc?sch_section=4&idx=20709 [https://perma.cc/2MVG-QD64] (last visited Nov. 1, 2024).
[17] Anna J. Park, HK-tied ELS compensation rate determined at 30-65% in 5 key cases, Korea Times (May 14, 2024), https://www.koreatimes.co.kr/www/biz/2024/10/602_374634.html [https://perma.cc/WG7Y-TL6E].
[18] Bo-yeon & Jae-eun, supra note 2.
[19] Id.
