Cheongwadae and Board of Audit Comprehensive Pressure... Crisis at Geumgamwon

Cheong Minjeong Office 'Financial Supervisory Service Inspection' Followed by Board of Audit and Inspection's High-Intensity Audit Announcement
Unprecedented Tip-off Requests to Financial Firms...Audit on Supervision Failures and Abuse of Disciplinary Authority
Bank Refusal to Compensate for KIKO Spreads, Leading to Lawsuits Against Sanctions
Strong Focus on 'Prosecution' Over Supervision...Growing Concerns Within Financial Supervisory Service

[Asia Economy Reporter Kangwook Cho] The Financial Supervisory Service (FSS) is facing a crisis. Following the recent inspection of the FSS by the Blue House's Office of Civil Affairs, the Board of Audit and Inspection (BAI) has also announced a rigorous audit. Notably, ahead of the audit on the FSS, the BAI requested whistleblowing from financial companies regarding the FSS. This is the first time the BAI has established a direct whistleblowing channel with individual financial firms prior to auditing related institutions.

Signs are emerging that banks are increasingly resisting compensation demands related to the foreign exchange derivative product KIKO. Sanctions related to overseas interest rate-linked derivative-linked funds (DLF) have also entered a new phase following a lawsuit filed by Sohn Tae-seung, Chairman of Woori Financial Group.

According to the financial sector on the 10th, the BAI's Industrial Finance Division 3 recently sent emails to financial associations and companies to collect whistleblowing reports. The Industrial Finance Division 3 is responsible for auditing the Financial Services Commission (FSC), its affiliated organizations, the FSS, and invested corporations. The email reportedly stated, "We are preparing an audit in the financial supervision sector, and if you have any opinions on system improvements, please feel free to share them." Particularly, the email included a mobile phone number and requested that any opinions be sent directly via text message to that number. It also emphasized that there is no need to go through associations when contacting them.

The financial sector is viewing the BAI's move as unusual. This is effectively the first time the BAI has set up a channel to receive direct feedback from individual financial firms without going through industry-representative associations. Some interpret this as the BAI intending to rigorously hold the FSS accountable, which has been at odds with the industry over recent issues such as KIKO, DLF, and Lime incidents, as well as to thoroughly identify problems in the overall financial supervision system.

A financial industry insider said, "The BAI began a preliminary audit of the FSS in early last month," adding, "The audit covers supervisory failures related to the DLF principal loss incident, as well as potential abuse of disciplinary authority over financial firms, including sanctions against CEOs of Woori and Hana Banks."

Particularly, the awkward sanctions related to DLF have sparked controversy. Criticisms focus on the ambiguous legal basis for CEO sanctions and whether the supervisory authority arbitrarily interpreted regulations. Consequently, there are voices suggesting that the FSS is shifting responsibility onto the financial sector through 'diluted disciplinary actions.'

Conflicts with the FSC revealed during this process are also problematic. When important decisions affecting the reappointment of CEOs of government-owned financial firms were made without the FSC's consent, a 'FSC bypass' controversy arose. Until now, FSC Chairman Eun Sung-soo had denied conflicts, calling the FSS a "good partner," but recently he left a lingering remark on the FSS director's sanction authority, saying he would "consider it without direction as a product of history."

Even the Blue House's Office of Civil Affairs has unusually launched an inspection of the FSS. It is known that the Office secured work documents mainly from the FSS's General Banking Inspection Division, which has primarily handled the DLF incident.

Meanwhile, on the 9th, Chairman Sohn of Woori Financial Group filed an administrative lawsuit and a provisional injunction against the FSS's 'reprimand warning' measure in his personal name. The FSS stated it would "proceed according to procedures," but the fact that it is engaged in legal disputes with an audited institution itself appears embarrassing.

The recent difficulties with the KIKO compensation issue also illustrate a facet of the backlash. The Korea Development Bank and Citibank have already notified their refusal to accept compensation. Hana, Daegu, and Shinhan Banks have requested extensions for their final positions. So far, only Woori Bank among the six banks has complied with the recommendation.

Concerns are growing within the FSS as well. There are criticisms that under the pretext of consumer protection, financial firms are being defined solely as 'enemies,' and that the FSS is focusing on a hardline approach centered on 'inspection' functions, which are more punitive, rather than its original 'supervisory' role.

A financial authority official said, "While Governor Yoon has been praised for his conviction and determination in restoring comprehensive inspections and enhancing the FSS's independence and stature, there are also voices criticizing him for pursuing an unconditional hardline approach that only pressures financial firms," adding, "From his remarks immediately after taking office, where he declared a war against financial firms, concerns are growing that emphasizing only the independence of financial supervision is causing friction with other policy departments."

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