DLF and Lime... Yoon Seok-heon’s 'Very Uncomfortable' Meeting with the 5 Major Holding Company Chairmen (Comprehensive)

All Major Financial Holding Companies Expose Consumer Protection and Internal Control Flaws... Supervisory Authorities' Responsibility Highlighted
Despite Emphasizing Internal Control... Yoon Seok-heon, Financial Supervisory Service Chief, Awkward Meeting with Holding Company Chairmen Scheduled Next Week

[Asia Economy Reporter Kwon Haeyoung] Yoon Seokheon, Governor of the Financial Supervisory Service (FSS), will meet with the chairmen of the five major financial holding companies for the first time this year. Since all major financial holding companies are currently under close watch by the FSS due to internal control failures within their affiliates, this meeting is expected to be the most uncomfortable gathering so far.

According to financial industry sources on the 18th, Governor Yoon will meet next week with the chairmen of the five major holding companies: Shinhan, KB, Hana, Woori, and NH Nonghyup Financial. This is the first meeting of the year. Kim Dongseong, Deputy Director in charge of banking at the FSS, will also attend.

A financial industry insider said, "Currently, there is no financial holding company free from defects in consumer protection and internal control, and especially Woori and Hana Financial are affected in their governance due to sanctions related to derivative-linked funds (DLF)." He added, "Usually, sensitive issues are not mentioned in these meetings, but this time, related topics may come up, so all the holding company chairmen will feel like they are sitting on a bed of nails."

The person expected to feel the most awkward face-to-face with Governor Yoon is Sohn Tae-seung, Chairman of Woori Financial Group (and CEO of Woori Bank). Chairman Sohn received a severe disciplinary warning from the FSS’s disciplinary committee for the incomplete sales of DLFs that caused massive losses to investors. Due to this sanction, he cannot be reappointed after his term expires in March, but he has announced plans to file an administrative lawsuit, opposing the FSS. Within the FSS, a "serious" atmosphere toward Woori Financial is sensed. They plan to bring the case of unauthorized changes to customer passwords at Woori Bank to the disciplinary committee immediately.

Shinhan Financial Investment, at the center of the Lime Asset Management scandal where investors suffered losses due to fund rollovers, is also uneasy. The FSS inspection confirmed that Shinhan Financial Investment manipulated returns arbitrarily and sold the Lime-operated trade finance fund, which had suspended redemptions, to investors as if it were a normal fund, even after recognizing its insolvency. Shinhan Bank also discovered belatedly that some of the 270 billion KRW of normal funds previously sold had flowed into bad funds but kept this quiet from investors for several months. Shinhan Financial operates a matrix system in its wealth management (WM) division, where the holding company, bank, and securities collaborate.

Hana Financial is also on the hot seat, appearing repeatedly in issues of consumer protection and internal control failures, from DLF to the Lime scandal. KB Financial is not free from these problems either. Although KB Securities has recently started compensations, principal losses occurred due to fraud by the management company in the Australian real estate private equity funds previously sold. KB Kookmin Bank sold large amounts of KOSDAQ leveraged exchange-traded funds (ETFs) as trust products to investors, some of whom reportedly suffered valuation losses exceeding 50%.

Since his inauguration in May 2018, Governor Yoon has been deeply concerned about the breakdown of internal control functions in financial companies. Especially, as his first major initiative after taking office, he proposed innovation measures through the "Financial Institution Internal Control Innovation Task Force (TF)," showing his strong interest in internal control. The innovation plan included clarifying the roles and responsibilities of financial institution boards and CEOs regarding internal control and enhancing the status and capabilities of compliance officers. At that time, the FSS pushed for institutional improvements, but the Financial Services Commission, which holds the authority to amend laws and supervisory regulations, rejected the proposals, preventing legislative progress.

However, with major financial accidents occurring consecutively from DLF to the Lime scandal, calls for accountability from financial authorities are rising. The financial authorities are expected to face intense criticism at the upcoming National Assembly’s Financial Services Committee meeting scheduled for the 20th. The Financial Services Commission lowered the private fund investment limit from at least 500 million KRW to 100 million KRW in October 2015, lowering the threshold for general investors. The FSS is criticized for negligence in managing and supervising private funds.

A financial industry official said, "Governor Yoon will likely urge the holding company chairmen to strengthen internal controls during this meeting," adding, "Both sides usually refrain from sensitive remarks, but this meeting will be more tense than ever."

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