Shinhan Bank Faces Record Fine Over Hong Kong ELS Sales
Seoul, November 28, 2023 – South Korean financial authorities have notified Shinhan Bank of an impending fine of approximately 300 billion won (roughly $230 million USD) related to the sale of Hong Kong-indexed Equity linked Securities (ELS), marking the largest-ever sanction of its kind. The action stems from concerns over insufficient risk disclosures to investors regarding the high-risk derivatives sold between 2020 and 2024.
Shinhan Bank’s sales of these Hong Kong H Index-linked ELS totaled approximately KRW 2.3701 trillion.The Financial Supervisory service (FSS) steadfast the bank failed to adequately inform customers about the potential risks associated with the complex financial products.
The impending fine is expected to negatively impact Shinhan Bank’s capital soundness. According to industry analysis, the penalty will likely necessitate an accumulation of 6 to 7 times the fine amount in risk-weighted assets (RWA), potentially reaching 6 to 7 trillion won for Kookmin Bank as a broader example. This increase in RWA will lead to a decline in the bank’s Common Equity Tier 1 (CET1) ratio, a key indicator of financial health, as the CET1 ratio is calculated by dividing equity capital by RWA.
A bank official expressed concern that the deteriorating capital soundness could hinder the bank’s ability to meet government targets for “productive finance and inclusive finance.” “I don’t know how well we can meet the government’s demand for participation in productive finance and inclusive finance in a situation where capital soundness is deteriorating due to the imposition of astronomical fines,” the official stated.
The sanctions highlight a growing emphasis on financial consumer protection following the enforcement of the Financial Consumer Protection Act and increased scrutiny of banking sector sales practices.Shinhan Bank is responding to the issue based on its existing financial product sales and risk management protocols.
