DLF Loss Incident, Growing Calls for Regulatory Accountability (Comprehensive)

"Is There No Responsibility for Lack of Management and Supervision?"
Criticism of Scapegoating Due to Excessive Sanctions

[Asia Economy Reporter Kim Hyo-jin] The responsibility debate surrounding the heavy disciplinary actions (official warnings) against the CEOs of Woori Bank and Hana Bank in connection with the overseas interest rate-linked derivative-linked fund (DLF) loss incident is spreading inside and outside the market, focusing on the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). In particular, the FSS, despite bearing significant responsibility for its failure to supervise the banking sector and investment industry, is criticized for fueling controversy by focusing solely on disciplining the CEOs based on vague regulatory grounds lacking specificity.

According to financial circles on the 5th, the People's Solidarity for Participatory Democracy (PSPD) Economic and Financial Center criticized in a commentary titled "The responsibility for the DLF incident does not lie solely with the banks" released the day before, stating that "the financial authorities also bear significant responsibility for their lax oversight and supervision." PSPD urged the recognition that the fundamental cause of the DLF incident was the FSS's negligence in supervising financial institutions and called for the establishment of 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 the responsibility issue, may have resorted to excessive sanctions as a scapegoating tactic. A senior executive of a commercial bank said, "Can we overlook the fact that the FSC relaxed regulations on private funds in 2015, which contributed to the DLF incident?" and lamented, "It is difficult to understand why the authorities have hardly made any responsible statements regarding this background during the DLF sanction 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 added, "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 regarding issues in the supervisory system. The only comments made by FSC Chairman Eun Sung-soo and FSS Governor Yoon Seok-heon about the responsibility for the DLF incident were apologies expressed through the media after the incident occurred last year.

There are also ongoing criticisms that the regulatory grounds for the sanctions are ambiguous. The FSS Sanctions Review Committee imposed the heavy disciplinary actions based on the Financial Company Governance Act, which requires financial companies to establish internal control standards, and its enforcement decree mandating the establishment of 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, putting the group on high alert. It is known that Chairman Sohn is expected to announce his position regarding his tenure at the regular board meeting for Woori Bank's financial statements as early as the 7th. There is also a possibility he will express his stance at a preliminary meeting on the 6th.

Although Chairman Sohn can complete his remaining term despite the heavy disciplinary action, it will be difficult for him to hold any executive position in a financial company for the next three years. Woori Financial Group recommended Chairman Sohn as the next chairman with a three-year term last December. If Chairman Sohn decides not to seek reappointment, governance confusion is inevitable, and the major executive appointment procedures that have been underway will have to start over from scratch.

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