Raime Suspension, KIKO Compensation... First Test of 'Jo Yong-byeongho' Entering 2nd Term System (Comprehensive)

Assessment of Shin Yong-byeong, Shinhan Financial Group Chairman's Crisis Management Skills and Consumer Protection Philosophy
Whether Shinhan Investment Corp Exercises Priority Repayment Rights in Lime Asset Management and TRS Contracts Also Puts the 'Major Shareholder' Shinhan Financial Group in Control

[Asia Economy Reporter Kwon Haeyoung] Cho Yong-byeong, chairman of Shinhan Financial Group, who has effectively secured his reappointment, has accepted 'consumer protection' as his first task for the second term. This involves resolving the Lime Asset Management scandal, which caused significant losses to investors due to fund rollovers, and the compensation issue related to the foreign exchange derivative product 'KIKO' that caused substantial damage to small and medium-sized enterprises during the 2008 financial crisis. Attention is focused on how he will solve the equation involving conflicts of interest between shareholders and consumers and securing long-term trust in financial companies.

On the 28th, a financial regulator stated, "Once the loss amount is confirmed following the announcement of the Lime Asset Management due diligence results, the issue of exercising the priority repayment rights arising from total return swap (TRS) contracts signed by securities firms such as Shinhan Financial Investment will come to the forefront," adding, "Although this is a matter that financial authorities cannot intervene in, if securities firms decide to waive all or part of their rights in the interest of consumer protection, the scope of relief for general investors will increase."

The trade finance fund among the Lime Asset Management funds that suspended redemptions amounts to 600 billion KRW. Previously, Shinhan Financial Investment lent 360 billion KRW to this fund through a TRS contract. The problem is that out of the 600 billion KRW in the trade finance fund, 240 billion KRW is practically unrecoverable. If Shinhan Financial Investment exercises its priority repayment rights on the 360 billion KRW loan, the portion available to general investors disappears. This represents a direct conflict between shareholder interests and consumer interests.

While the financial authorities say it is up to the financial company to decide, they hope Shinhan Financial Investment will take a step forward to protect consumers. Another financial regulator said, "There are criticisms that if Shinhan Financial Investment exercises its priority repayment rights, it could be considered a breach of fiduciary duty to shareholders, but the largest shareholder of Shinhan Financial Investment is Shinhan Financial Group," adding, "It depends on Shinhan Financial Group's decision."

Shinhan Financial Group stated, "We will discuss response measures, including whether to exercise priority repayment rights, after the due diligence results are released." At the group level, there is a burden as the Lime Asset Management scandal could highlight responsibility issues across the entire group, including Shinhan Financial Investment, Shinhan Bank, and Shinhan Financial. The Financial Supervisory Service suspects Shinhan Financial Investment's involvement in the Lime Asset Management fraud, and to make matters worse, it was recently revealed that some of the 270 billion KRW in Lime Asset Management Credit Insured (CI) funds sold by Shinhan Bank flowed arbitrarily into non-performing funds that suspended redemptions. Notably, Shinhan Financial Group's exposure to Lime Asset Management risk totals 1.1242 trillion KRW, the largest among financial holding companies. The group cannot ignore the reputational risk.

Within the financial sector, there are also opinions that exercising priority repayment rights is a natural right of Shinhan Financial Investment. Some view that other sellers such as banks and investors cannot recover their investments through Lime Asset Management, thus emphasizing Shinhan Financial Investment's responsibility. However, given the worsening public opinion, Shinhan Financial Group cannot rule out the possibility of waiving all or part of its priority repayment rights regarding Lime Asset Management.

KIKO compensation is also one of Chairman Cho's major issues. Although it depends on the management and board decisions of Shinhan Bank, it is an issue that cannot be overlooked at the group level. The total KIKO compensation amount for Shinhan Bank, combining the Financial Supervisory Service's dispute mediation and voluntary adjustment amounts, is 55 billion KRW, the highest among domestic banks. Since KEB Hana Bank and Woori Bank have effectively agreed to the Financial Supervisory Service's compensation recommendations, this could be a burden for Shinhan Bank. It is reported that the board's approval is not easy due to opposition from outside directors, citing the expiration of the legal statute of limitations and potential future breach of fiduciary duty issues.

A financial industry insider said, "The financial sector is paying close attention to how Chairman Cho will handle the issues he faces after effectively securing his reappointment following a suspended sentence ruling for recruitment irregularities," adding, "Since the Lime scandal and KIKO compensation involve consumer protection, risk management, and reputational issues, Chairman Cho's philosophy and crisis management skills will be put to the test."

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