[Column] The Homework Left to the Financial Supervisory Service by the DLF Scandal

[Asia Economy Reporter Kwon Haeyoung] The level of sanctions against Woori Bank and KEB Hana Bank, which sold overseas interest rate-linked derivative-linked funds (DLF) that shook the financial sector last year, will be decided on the 30th. The impact of the DLF incident was significant. Trust in banks was shattered. Criticism surged, and even the political sphere took aim. Eventually, it even influenced the governance structure of financial holding companies.

It is natural to hold banks accountable for shaking trust due to the incomplete sale of DLFs. Institutional and personnel sanctions are an inevitable step. However, opinions differ regarding the severe disciplinary action against the chief executive officers (CEOs). Veterans at the Financial Supervisory Service (FSS) who have handled banking operations for over 20 years predicted that the Inspection Bureau would find it difficult to link sanctions directly to the CEOs, as they expected no evidence of CEO involvement. This prediction seems to have been accurate. The Inspection Bureau notified severe sanctions against the CEOs, citing vague reasons such as 'insufficient internal control' and 'excessive management pressure.' Since sanctions under the Governance Act were not applicable, they resorted to enforcement ordinances.

Regardless of the outcome of the DLF disciplinary hearing at the FSS on this day, it seems unlikely that the FSS will be able to smile. If the warning sanction is not enforced, the attempt at excessive sanctions is likely to be criticized. If the warning sanction is confirmed, Woori Financial Group, whose governance is shaken, is highly likely to take the matter to court to suspend the sanctions, leading to a direct confrontation. While this is a burden for Woori Financial Group, it is also a difficult situation for the FSS. Following Hana and Shinhan Financial Groups, Woori Financial Group may also confront the FSS over CEO reappointment issues.

The DLF incident left many tasks for banks. However, it also left challenges for the supervisory authorities. An FSS executive said, "In cases with significant social impact like the DLF incident, CEOs used to resign voluntarily. But as financial companies have grown stronger, they tend to resist. This is why the Inspection Bureau is pushing hard." As financial holding companies have grown larger, the relationship of 'FSS as the superior (Gap) and financial companies as the subordinate (Eul)' no longer holds. Even if there is insufficient basis for sanctions, the FSS's 'take it or leave it' disciplinary approach is undesirable. Financial companies will not accept it passively.

The FSS must consider the aftermath of the DLF sanctions. In the changed power dynamics, what the FSS must have is nothing but capability. Inspections must be precise, and the grounds for sanctions must be clear. Only with solid justification and effective enforcement of sanctions can the supervisory authority maintain its authority. Attempting to impose severe CEO sanctions over the DLF issue on banks that sell hundreds of investment products annually seems unreasonable no matter how you look at it.

The FSS is an elite organization with outstanding manpower. To manage and supervise financial companies amid an increasingly complex financial environment, strengthening the expertise of supervisory and inspection resources must be guaranteed. A sword that is not wielded is useless.

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