Blue House and Board of Audit Full-Scale Pressure Leads to Banks Refusing Compensation... Financial Supervisory Service Shaken (Comprehensive)

Cheong Minjeong Office 'Financial Supervisory Service Inspection' Followed by Board of Audit and Inspection's High-Intensity Audit Warning
Unprecedented Tip-Off Requests to Financial Firms...Audit on Supervision Failures and Disciplinary Power Abuse
Bank 'KIKO Compensation' Refusal Spreads, Leading to Appeals Against Sanctions
Strong Focus on 'Investigation' Over Supervision...Growing Concerns Within Financial Supervisory Service

[Asia Economy Reporter Jo Gang-wook] The leadership of the Financial Supervisory Service (FSS) is shaking. Following the recent inspection of the FSS by the Blue House's Civil Affairs Office, the Board of Audit and Inspection (BAI) has also announced a high-intensity audit. Notably, before the BAI's audit of the FSS, it requested whistleblowing from financial companies regarding the FSS. This is the first time the BAI has established a direct whistleblowing channel with individual financial companies ahead of audits of related institutions.

Meanwhile, signs are emerging that banks are increasingly rejecting 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 financial circles on the 10th, the BAI's Industrial Finance Division 3 recently sent emails to financial associations and companies to receive whistleblowing reports. Industrial Finance Division 3 is responsible for audits of the Financial Services Commission, its affiliated institutions, 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." In particular, the email included a mobile phone number and requested that any opinions be sent directly via text message to this number. It also emphasized that there was no need to go through associations when contacting them.

The financial sector views the BAI's move as unusual. This is because it is the first time the BAI has set up a channel to receive direct opinions from individual financial companies without going through associations representing the industry. 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, and to closely examine problems in the overall financial supervision system. There is also a perspective that this targets Governor Yoon, whose clashes with financial companies and the Financial Services Commission under the pretext of consumer protection have raised concerns and dissatisfaction.

A financial industry official said, "The BAI has already started a preliminary audit of the FSS since early last month," adding, "The audit covers the FSS's supervisory failures regarding the DLF principal loss incident, as well as whether the FSS abused its disciplinary authority over financial companies, including sanctions against CEOs of Woori and Hana Banks related to the DLF incident."

There is much speculation about the awkward sanctions related to the DLF. Criticisms focus on the ambiguous legal basis for CEO sanctions and whether the supervisory authority arbitrarily interpreted regulations. Because of this, some voices claim that the FSS is shifting its responsibility onto the financial sector through 'watering down sanctions.' The conflict with the Financial Services Commission revealed during this process is also problematic. There was even controversy over 'Financial Services Commission bypass' when important decisions affecting the reappointment of CEOs of government-owned financial companies were made without the Commission's consent. Financial Services Commission Chairman Eun Sung-soo, who had denied conflicts by saying "the FSS is a good partner," recently left a lingering remark about the FSS governor's disciplinary authority, saying, "I will consider it without direction as a product of history."

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

Meanwhile, on the 9th, Sohn, Chairman of Woori Financial Group, opposed the FSS's 'reprimand warning' and filed an administrative lawsuit and provisional injunction against the FSS in his personal name. The FSS expressed a calm stance, saying, "We will proceed according to procedures," but the fact that a supervised institution is engaged in legal disputes with the FSS is internally embarrassing.

The recent difficulties surrounding KIKO compensation also illustrate a facet of the backlash. The Supreme Court ruled in 2013 that the case was not unfair trading, but Governor Yoon brought it to the surface shortly after his inauguration, leading the FSS Dispute Mediation Committee to recommend compensation of up to 41% of losses to affected companies. However, the Korea Development Bank and Citibank have notified their refusal to accept this. 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 even within the FSS. There are criticisms that under the pretext of consumer protection, financial companies are being defined solely as 'enemies,' and the FSS is focusing on a strong enforcement drive on 'inspection' functions, which are closer to post-facto punishment, rather than its original 'supervisory' role.

A financial authority official said, "While Governor Yoon has been praised for raising the FSS's independence and status with conviction and determination, such as by reviving comprehensive inspections, there are also criticisms that he is only pursuing an unconditional strong enforcement drive, cornering financial companies," adding, "From his remarks immediately after taking office, where he said he would wage war against financial companies, 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.