A recommendation from South Korean financial regulators on voluntary compensation for affected investors following a steep fall in the value of equity-linked securities (ELS) tied to the Hang Seng China Enterprises Index faced backlash from ELS vendors, giving them full autonomy to determine levels of compensation as they need to be held accountable for mis-selling practices.

The sellers are calling for a specific guideline on compensation instead.

According to sources in the financial industry on Tuesday, ELS vendors, including major banks and brokerages, sent a signal that it could be difficult for them to come up with voluntary compensation plans without any official guidelines from financial regulators.

The concept of voluntary compensation stemmed from Financial Supervisory Service (FSS) Governor Lee Bok-hyun’s remarks on Monday, where he said, “It is imperative for the financial sector to establish its own voluntary compensation framework.”

The FSS said commercial banks had previously implemented voluntary compensation plans in 2019 when derivative-linked funds (DLF) incurred significant investor losses. In a similar mis-selling crisis known as the Lime Fund crisis in 2020, the Fair Trade Commission identified four representative cases out of 108 complaints and ruled in favor of the investors by mandating the return of the full principal by the vendor.

In response to the pressure from the financial authority, ELS vendors claimed that they find it challenging to use the previous approaches this time. Unlike the previous incidences, the latest one involved a public offering fund in which more than 150,000 people invested across five commercial banks. The DLF crisis, which suffered significant principal losses, had a much smaller group of affected investors, at 2,870.

“Given that retail investors are the most affected, developing voluntary compensation plans could be challenging for the vendors,” a source familiar with the financial industry said.

The latest survey showed that up to 17,000, or around 11 percent, of the retail investors were aged 70 and above, while those in their 50s and 60s were the largest age group among the victims.

By Yang Se-ho, Yoo Joon-ho, Park In-hye, Park Na-eun, and Han Yubin

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