Financial Authorities Shocked by DLF: "Do Not Reflect 'Bancassurance' in KPI" (Comprehensive)

"Bancassurance Contract Performance, Side Effects When Reflected in Work Evaluation"

Unusual Interpretation of Financial Institutions' Voluntary KPIs

Movement to Avoid Excessive Performance Demands by Banks

On the 16th, when the Financial Supervisory Service's Disciplinary Committee regarding the overseas interest rate-linked derivative-linked fund (DLF) incident, which caused massive principal losses, was held, members of the DLF Victims Countermeasure Committee and the Financial Justice Solidarity held a press conference in front of the Financial Supervisory Service in Yeouido, Seoul, demanding severe disciplinary actions against Woori Bank and Hana Bank. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Oh Hyung-gil] The financial authorities have stated that bank employees responsible for managing individual customers' wealth management (WM) should not be excessively pressured to achieve bancassurance (bank insurance sales) performance targets.

This interpretation comes as the financial authorities recognize the seriousness of reckless competition following a large-scale derivative product loss incident and have begun cracking down on banks' sales practices. Concerns have been raised both inside and outside the financial sector that short-term performance-oriented KPIs could lead to incomplete sales.

According to the financial sector on the 20th, the Financial Services Commission recently responded to commercial banks with a legal interpretation stating, "If insurance contract signing performance is reflected in the key performance indicators (KPIs) of personnel dedicated to individual customers, there is a risk of encouraging insurance solicitation by unqualified persons, so please exercise caution in your operations."

This is interpreted to mean that it is inappropriate to reflect bancassurance subscription performance in the job evaluations of bank WM or relationship managers (RMs) who are not qualified insurance solicitors. The current Insurance Business Act restricts the qualifications of solicitors to prevent harm to insurance contract holders caused by unqualified solicitation.

Bancassurance, which was expected to be a new sales channel when it emerged in 2003, has been treated as a representative product for meeting quotas in bank sales alongside loan performance and credit card issuance.

From the insurers' perspective, bancassurance has become a "gyeruk (chicken rib)"?something of little value. As sales competition intensified, banks frequently received up to 99% of the contract signing costs as solicitation commissions when selling bancassurance products. This meant that most of the business expenses were passed directly to the banks.

It is particularly unusual for the authorities to provide specific opinions on the 'KPI' employee evaluation system used by banks, which can also be interpreted as a warning against incomplete sales within banks, such as the recent overseas interest rate-linked derivative-linked fund (DLF) incident and Lime Asset Management scandal.

A financial authority official said, "Employee performance evaluations should be left to the autonomy of financial institutions," but added, "Operating employee evaluations that encourage insurance solicitation by unqualified persons is inappropriate even from the perspective of internal bank controls."

Furthermore, this recent legal interpretation by the authorities is expected to directly impact the ongoing KPI reform efforts by banks. There have been calls both inside and outside banks to improve KPIs, which have been abused as a means to increase non-interest income such as sales commissions.

Yoon Seok-heon, Governor of the Financial Supervisory Service, urged at a bank CEOs meeting last September, "We will improve the performance reward system and internal control system in relation to recent high-risk derivative product loss cases." At last year's National Assembly audit, Governor Yoon also identified the root cause of the DLF incident as "the KPI (key performance indicator) used to evaluate employee work performance."

In response, Shinhan Bank changed its KPI evaluation method from relative evaluation to absolute evaluation starting this year. They decided to eliminate all indicators except for five categories: customer value growth, customer base, profit, delinquency rate, and policy indicators. They also decided to include customer yield in the KPI and evaluate whether suitable products were sold to customers and whether after-sales management was conducted.

Woori Bank also reduced the number of KPI evaluation indicators reflected at branches from 24 to 10. They significantly increased the weighting of customer indicators such as customer yield and customer care to establish a customer-centric sales culture.

A senior financial official said, "As banks focused on external competition, KPIs were operated mainly based on sales performance, which pressured employees to achieve results," adding, "The competition should shift from how much product was sold to how satisfied the customers are."

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