[DLF Heavy Sanctions] 'Red Card' for Woori and Hana Bank CEOs... Background of Disciplinary Committee Decision (Comprehensive)

FSS: "Repeatedly pointed out internal control issues at Woori and Hana Banks but no improvement... Supervisors must be held accountable"
Financial Services Commission also sided with 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

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

[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 relation to the Derivative Linked Fund (DLF) incident, influenced by 'enhanced punishment.' Although the internal control deficiencies of the two banks were repeatedly warned since 2017, no improvements were made, and the fact that each bank had already received an institutional warning last year also affected the level of CEO sanctions this time. The Financial Services Commission (FSC), which had not clearly stated its position until now, reportedly sided with the FSS, which had been advocating for severe sanctions on the CEOs during the disciplinary hearing the day before.

On the 31st, a senior official from the FSS stated, "We have repeatedly pointed out the need for internal control improvements to Woori Bank and Hana Bank, and the banks have also reported improvements several times," adding, "The supervisory authority repeatedly pointed out the problems, but since the banks did not make efforts to improve, the responsibility of the supervising CEOs was held accountable."

Previously, the FSS evaluated Hana Bank's management status and found poor internal control ratings, leading to a Memorandum of Understanding (MOU) on internal control improvements with the bank in 2017. 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.

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 status 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 judges that the two banks effectively 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," adding, "A bank's Key Performance Indicators (KPIs) 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's severe sanctions this time. 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 call options on Exchange Traded Notes (ETNs). Repeated institutional sanctions can lead to enhanced punishments, which reportedly played a role in the CEO sanctions.

The FSS is particularly serious about Woori Bank's internal control system. Another senior FSS official said, "Woori Bank has had issues including a prior IT system failure, delayed reporting of large cash transactions, and now incomplete sales of DLFs," adding, "Deficiencies related to internal control have been confirmed throughout the bank, raising significant concerns." The FSS is expected to hold a disciplinary hearing related to Woori Bank's IT system failure within the year.

Regarding the severe CEO sanctions, the FSC also supported the FSS. FSC members attend the FSS disciplinary committee, and it is reported that they agreed with the FSS's decision on CEO sanctions the day before.

The banks are protesting that the FSS's grounds for sanctions are weak. While acknowledging responsibility for 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. On the other hand, the FSS counters by citing enforcement ordinances, arguing that 'effective' internal control standards are necessary.

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

Meanwhile, Woori Financial Group held a Group Executive Candidate Recommendation Committee meeting on the morning of the same day to select the next candidate for Woori Bank president. The committee, composed of outside directors, is expected to have focused on discussing the position of Woori Financial Group Chairman (also Woori Bank President) Sohn Tae-seung in relation to the disciplinary hearing held the previous day. If the severe sanction is finalized, Chairman Sohn, whose term expires at the end of March, will not be able to be reappointed. The financial sector anticipates that Woori Financial Group will file a provisional injunction to suspend the effect of Chairman Sohn's sanction with the court and proceed with an administrative lawsuit.

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