[DLF Heavy Sanctions] Financial Supervisory Service's Unexpected Severe Penalty... The Background Behind the 'Red Card' Decision

Financial Supervisory Service: "Repeatedly pointed out internal control issues at Woori and Hana Banks but no improvement... Supervisors must be held accountable"
Financial Services Commission also backed FSS on CEO heavy sanctions at previous disciplinary hearing
Woori Bank, shaking holding company governance, likely to file injunction to suspend CEO sanctions and administrative lawsuit

Yoon Seok-heon, Governor of the Financial Supervisory Service

[Asia Economy Reporter Kwon Haeyoung] The Financial Supervisory Service's (FSS) Disciplinary Committee imposed an unexpected severe sanction of a 'reprimand warning' on the CEOs of Woori Bank and KEB Hana Bank in connection with the Derivative Linked Fund (DLF) scandal, influenced by 'enhanced punishment.' Despite multiple warnings since 2017 about internal control deficiencies at both banks, no improvements were made, and the fact that each bank had already received an institutional warning last year also affected the severity of the CEO sanctions. The Financial Services Commission (FSC), which had not previously taken a clear stance, reportedly supported the FSS's decision for severe CEO sanctions at the Disciplinary Committee meeting the day before.

On the 31st, a senior FSS official stated, "We repeatedly pointed out the need for internal control improvements to Woori Bank and Hana Bank, and the banks also submitted several improvement reports," adding, "The supervisory authority repeatedly highlighted the issues, but since the banks did not make efforts to improve, the responsibility was placed on the CEOs as supervisors."

Previously, following the management evaluation of Hana Bank, the FSS found poor internal control ratings and signed a Memorandum of Understanding (MOU) with the bank in 2017 to improve internal controls. In 2018, issues were found during inspections of trust product sales and mystery shopping (secret inspections) on derivative product sales, prompting calls to improve internal control deficiencies. After mystery shopping, financial companies are rated on a five-level scale: excellent, good, average, poor, and very poor. In 2018, Hana Bank received a 'very poor (below 60 points)' rating, and Woori Bank received a 'poor (60s)' rating.

Son Tae-seung, Chairman of Woori Financial Group and CEO of Woori Bank

Ham Young-joo, Vice Chairman of Hana Financial Group Photo by Yonhap News

The FSS explained that Woori Bank was also given several 'yellow cards.' In the 2018 management evaluation of Woori Bank, internal control deficiencies were warned, and the bank received low scores in the derivative product sales mystery shopping conducted the same year, leading to orders for internal control improvements.

According to the FSS, Woori Bank and Hana Bank reported improvements to their internal control systems in December 2018, April 2019, and July 2019. Due to limitations in supervisory and inspection personnel, the FSS encourages financial companies to strengthen their autonomous internal control functions, but it believes that the two banks submitted false reports.

A senior FSS official explained the reason for the severe CEO sanctions, saying, "Overseas supervisory authorities also impose enhanced punishments if financial companies do not implement recommended improvements," and "A bank's Key Performance Indicators (KPI) are essentially the CEO's directives for annual business goals. Despite pointing out internal control deficiencies related to product sales, the banks did not improve and excessively pushed sales through KPIs."

The fact that Woori Bank and Hana Bank each received an 'institutional warning' sanction from the FSS last year also influenced the CEO sanctions. Woori Bank was sanctioned in September last year for delayed reporting of large cash transactions, and Hana Bank was sanctioned in November for incomplete sales of short-selling Exchange Traded Notes (ETNs). Repeated institutional sanctions can lead to enhanced punishments, which reportedly played a role in the CEO sanctions this time.

The FSS is particularly concerned about Woori Bank's internal control system. Another senior FSS official said, "Woori Bank previously had issues such as a system failure incident, delayed reporting of large cash transactions, and now incomplete sales of DLFs," adding, "Deficiencies related to internal controls have been found throughout the bank, raising serious concerns." The FSS is expected to conduct a disciplinary hearing related to Woori Bank's system failure incident within the year.

Regarding the severe CEO sanctions, the FSC also sided with the FSS. The FSC participates as a member in the FSS Disciplinary Committee and reportedly agreed with the FSS's decision to sanction the CEOs severely the day before.

On the other hand, the banks are protesting, claiming that the FSS's grounds for sanctions are weak. While acknowledging responsibility for the incomplete sales of DLFs, they argue that linking this to CEO sanctions is excessive. According to the Governance Act, if internal control standards are established, the CEO cannot be punished. However, the FSS counters by citing enforcement ordinances, stating that 'effective' internal control standards are necessary. Following this severe sanction decision, Son Tae-seung, Chairman of Woori Financial Group (also CEO of Woori Bank), whose term expires at the end of March, is expected to file a provisional injunction to suspend the sanction's effect and pursue administrative litigation.

Some also raise questions about the responsibility of financial authorities regarding the DLF scandal. After the FSC relaxed the minimum investment limit for private funds from 500 million won to 100 million won in 2015, the private fund market rapidly expanded, and the FSS's lax supervision is criticized for causing this incident.

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