Only a limited number of bank branches will be permitted to sell equity-linked securities, following last year's misselling crisis linked to the main Hong Kong stock index, which resulted in 4.6 trillion won ($3.2 billion) in losses for local investors, the country's top financial regulator announced Wednesday.

The Financial Services Commission stated that only bank branches equipped with safety measures will be allowed to sell ELS. Backed by new safety measures, ELS -- currently off-limits to new investment -- will be back on the market by September.

“Since most bank branches did not separate sales counters for highly complex financial investment instruments from those for deposits, many bank customers misinterpreted ELS as principal-guaranteed products,” Financial Services Commission Vice Chairman Kim So-young said at a press briefing.

“Of the approximately 3,900 branches operated by the five major commercial banks in the country, about 5-10 percent will be permitted to operate as hub branches, allowing them to sell ELS,” Kim said.

The measures were drawn up in response to the massive misselling incident related to the Hang Seng China Enterprises Index. In early 2024, as the Hong Kong-linked index declined, local investors experienced losses in their ELS investments. The losses mounted to 4.6 trillion won, according to the regulator.

At the time, the FSC decided the banks should provide compensation for part of the customer losses as they sold the products without full disclosure of the associated risks.

Under the new measures, banks with sufficient space and staff will be designated as "hub branches" permitted to sell ELS. Brokerage houses, on the other hand, will not be restricted as the regulator views the firms' customers as having a sufficient understanding of the investment vehicle.

The banks' hub branches will have to physically separate the ELS sales area, either by providing separate entrances or designating separate floors. Also, only sales employees with sufficient experience will be allowed to offer the products to customers.

Meanwhile, sales of other highly complex financial instruments, referring to derivatives, derivative-linked securities and products that have the potential for losses of over 20 percent of principal, will not be limited at banks.

“ELS is a different type of product when compared to other highly complex investment instruments. With ELS, there is a high possibility that the investors misinterpret the product as a savings product,” Kim explained.

“Banks have to be more conscious of consumer protection in their sales. An improvement in their business practices is needed,” Kim said. “Banks should change their practices and culture to prevent misselling and to achieve tighter internal controls.”

By Im Eun-byel (silverstar@heraldcorp.com)