Second DLF Sanctions Review Meeting with No Conclusion Scheduled for 22nd... Third Meeting Likely on 30th (Comprehensive)

Despite Over 11 Hours of Meeting, Stalemate Continues... Second Session Scheduled for the 22nd

FSS and Banks in Sharp Conflict Over Disciplinary Measures for Executives

[Asia Economy Reporter Jo Gang-wook] The Financial Supervisory Service's (FSS) first disciplinary committee meeting regarding the overseas interest rate-linked derivative-linked fund (DLF) scandal, which caused massive principal losses, was held on the 16th but failed to reach a conclusion even after more than 11 hours of discussion. The FSS plans to hold a second disciplinary meeting on the 22nd, about a week earlier than the originally scheduled date of the 30th. Since the first disciplinary meeting mainly focused on KEB Hana Bank, discussions regarding Woori Bank are expected to intensify in the second session. Given the fierce debate over the level of disciplinary action against the CEOs, there is also a possibility that the disciplinary process could extend beyond three sessions.

According to the FSS and banking circles on the 17th, the first disciplinary meeting started at 10 a.m. and ended around 9 p.m. The meeting was conducted in an adversarial format, with the FSS investigation department and the banks under scrutiny each presenting their opinions. Son Tae-seung, Chairman of Woori Financial Group, and Ham Young-joo, Vice Chairman of Hana Financial Group, who had been preliminarily notified of severe disciplinary action in the form of a written warning, attended the meeting in person to make their defense.

The review of KEB Hana Bank reportedly continued until 7 p.m. Afterwards, the review of Woori Bank lasted only about two hours and concluded without a decision. Originally, the Woori Bank disciplinary review was scheduled to start around 4 p.m., but the Hana Bank review did not finish until after 7 p.m. Chairman Son Tae-seung arrived at the FSS’s 11th-floor main conference room around 2:30 p.m. but had to wait for more than four and a half hours.

An FSS official stated, "The disciplinary committee convened to review the corrective measures based on the on-site inspections of KEB Hana Bank and Woori Bank, but due to prolonged discussions, it was decided to hold a re-examination later."

During the disciplinary meeting, the FSS and the banks reportedly took sharply opposing stances over the severity of disciplinary measures against the executives. The core issue was whether executives could be disciplined for internal control failures. The FSS cited "lack of internal control" and "excessive management pressure" as grounds for sanctions, pointing out that excessive sales efforts at the bank headquarters level and poor internal controls led to the incomplete sales of DLFs. The FSS claimed that legal reviews had already been completed.

However, the banks argued that there is weak legal basis to impose severe disciplinary action on CEOs for internal control failures. The current Financial Company Governance Act stipulates that "financial companies must establish internal control standards." The enforcement decree requires "effective internal control standards" to be established. However, there is no provision allowing CEOs to be punished for internal control deficiencies. The Financial Services Commission announced last year that it would prepare grounds to hold CEOs and other executives accountable to prevent recurrence of consumer damage like the DLF incident. However, the related amendment to the Financial Company Governance Act is currently pending in the Political Affairs Committee.

The banks also reportedly claimed that executives such as Chairman Son and Vice Chairman Ham were not directly involved in the incomplete sales of DLFs. They emphasized their efforts to minimize customer damage and establish preventive measures after the incident. Earlier, the FSS’s on-site inspection did not find evidence that executives including Chairman Son and Vice Chairman Ham directly ordered DLF sales.

Disciplinary measures for financial company employees range from light sanctions such as caution and warning to severe sanctions including written warning, suspension (leave), and dismissal recommendation. Executives who receive severe sanctions may complete their remaining term but cannot serve as executives in financial companies for three years thereafter. Therefore, although Chairman Son succeeded in his reappointment last year, if severe disciplinary action is confirmed before the March shareholders’ meeting, reappointment may become impossible. Vice Chairman Ham, who was considered the top successor to Chairman Kim Jung-tae of Hana Financial Group, would be unable to challenge for the next chairman position if he receives severe sanctions. They may file objections and seek provisional injunctions from the court to suspend the disciplinary effect, but this could be burdensome as it may be seen as opposing the FSS. The FSS has already preliminarily notified executives Son and Ham of the severe "written warning" sanction.

Since both sides presented parallel arguments from the first disciplinary meeting, it is expected that considerable time will be required before a decision is reached. The FSS announced through a notice that "the schedule for the next disciplinary meeting will be announced once confirmed." The second disciplinary meeting was originally scheduled for the 30th, two weeks later, but the schedule was moved up to accelerate discussions. The 22nd is the most likely date for the second meeting. It is also interpreted that the proximity of the Lunar New Year holiday on the 23rd influenced this decision. The second disciplinary meeting is expected to focus on Woori Bank. There is also a possibility of a third disciplinary meeting on the 30th.

Some voices criticize that placing all responsibility for the incident solely on the CEOs and imposing severe sanctions contradicts the government's innovative financial policy. There are concerns that if CEOs are held accountable for hundreds of products sold by financial companies, it could lead to risk-averse behavior. There are also criticisms that the FSS, which should prevent and manage financial accidents, is imposing excessive sanctions on financial companies to avoid responsibility.

Previously, the Board of Audit and Inspection pointed out in its 2017 audit of the FSS’s institutional operations that the FSS imposed sanctions on financial company employees without legal grounds and instructed the FSS to clarify the basis for sanctions against financial institutions and employees and to establish legal grounds for exemptions from fines.

A financial industry official said, "Because the issue is serious, it is unlikely to conclude after just one or two disciplinary meetings. Especially since sanctions involve not only CEOs but also financial institutions, the final decision by the Financial Services Commission is necessary, so even after the disciplinary level is decided, it may take considerable time before it takes effect."

This content was produced with the assistance of AI translation services.