"Was It Really Only the Banks at Fault?"... Growing Calls for Financial Authorities' Accountability in the DLF Scandal

"No Responsibility for Lack of Supervision?"
Criticism of Scapegoating Due to Excessive Sanctions

[Asia Economy Reporter Kim Hyo-jin] The issue of heavy disciplinary actions (official warnings) against the CEOs of Woori Bank and Hana Bank related to losses from overseas interest rate-linked derivative-linked funds (DLF) is sparking growing debates both inside and outside the market about the responsibilities of the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). In particular, the FSS is criticized for focusing solely on disciplining the CEOs based on vague regulatory grounds despite its significant failure in supervising banks and the investment industry, thereby fueling controversy.

According to financial circles on the 5th, the People's Solidarity for Participatory Democracy (PSPD) Economic and Financial Center issued a statement titled "The responsibility for the DLF incident does not lie solely with the banks" the day before, criticizing that "the financial authorities also bear significant responsibility for negligence in monitoring and supervision." PSPD urged the authorities to "acknowledge that the fundamental cause of the DLF incident was the FSS's lax supervision of financial institutions and to establish a financial consumer protection agency." Given that PSPD is a progressive civic group emphasizing checks and controls on large capital and holding the market accountable, its criticism of the supervisory authorities is unusual.

In fact, in the market, there is a strong voice of criticism that the supervisory authorities, conscious of their responsibility, may have resorted to excessive sanctions as a scapegoating measure. A senior executive of a commercial bank said, "Can we overlook the fact that the FSC relaxed regulations on private equity funds in 2015, which contributed to the DLF incident?" and added, "It is hard to understand why the authorities have hardly made any responsible statements regarding this background during the DLF sanctions phase."

Another executive from a commercial bank pointed out that the government (Korea Deposit Insurance Corporation) is the largest shareholder holding about 17% of Woori Financial Group's shares, saying, "In a situation where KDIC is preparing to sell its shares, the management must have felt enormous pressure to increase the share value," and criticized, "The authorities cannot be unaware that such a complex context lies behind the sales of high-risk investment products."

Since the decision on the heavy disciplinary actions against Sohn Tae-seung, Chairman of Woori Financial Group, and Ham Young-joo, Vice Chairman of Hana Financial Group, on the 30th of last month, the FSC and FSS have been accelerating only the procedures to enforce the sanctions without presenting any plans or related remarks on issues such as the supervisory system. The only remarks made by FSC Chairman Eun Sung-soo and FSS Governor Yoon Seok-heon regarding responsibility for the DLF incident were apologies expressed through the media after the incident last year.

There are also ongoing criticisms that the regulatory grounds for the sanctions are ambiguous. The FSS Disciplinary Committee imposed the heavy sanctions based on the Financial Company Governance Act, which requires "financial companies to establish internal control standards," and its enforcement decree, which mandates "effective internal control standards." The logic is that the management failed to fulfill their legal obligations, but there is significant debate over whether Woori Bank's internal control standards were so deficient and ineffective as to warrant heavy sanctions against the CEO.

The financial sector is paying close attention to whether the Board of Audit and Inspection will initiate a public interest audit requested by PSPD and others in November last year regarding the DLF incident. An official from the Board of Audit and Inspection said, "We are comprehensively reviewing the situation so far to consider whether to conduct an audit," adding, "The schedule for making a final decision has not yet been determined."

Banks are concerned about the imminent chaos in management and governance. In particular, for Woori Financial Group, this heavy disciplinary action is directly linked to Chairman Sohn's position and reappointment, raising an emergency situation. Sohn is reportedly expected to announce his stance on his position at the regular board meeting for Woori Bank's financial statements as early as the 7th.

Although Sohn can complete his remaining term despite the heavy sanctions, it has become difficult for him to hold an executive position at a financial company for the next three years. Woori Financial Group recommended Sohn as the next chairman with a three-year term last December. If Sohn decides not to seek reappointment, governance confusion is inevitable, and the major executive appointment processes that have been underway will have to start over.

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