Thought COVID Would Settle It... Financial Supervisory Service and Banks Rekindle Conflict

Administrative Lawsuit Over CEO's Severe Disciplinary Action Related to DLF and Conflict Over KIKO Compensation
Pressure of Preemptive Compensation for Lime Asset Management Fund Losses Also a Burden

[Asia Economy Reporter Jo Gang-wook] The conflict between the Financial Supervisory Service (FSS) and commercial banks, which had subsided due to the spread of the novel coronavirus infection (COVID-19), appears to be reigniting. Legal disputes over fines related to overseas interest rate-linked derivative-linked funds (DLF) are becoming inevitable, and administrative lawsuits concerning the severe disciplinary actions against CEOs are expected to resume. In addition, while the FSS is taking a strong stance on the foreign exchange derivative product KIKO compensation plan, sharp confrontations are emerging, and the so-called 'Lime Bad Bank' is also experiencing last-minute difficulties before its launch.

According to the financial sector on the 25th, Woori Bank and Hana Bank submitted objection applications to the Financial Services Commission (FSC) on the afternoon of the 22nd regarding the DLF fines. This came 58 days after receiving notifications of fines amounting to 19.7 billion KRW and 16.8 billion KRW respectively from the FSC on March 25. Objection applications can be submitted within 60 days after the fine notification, theoretically until the 24th, but since the 24th was a Sunday, the 22nd was effectively the last day to apply. Once the objection is filed, the enforcement of the fine is suspended. Subsequently, the case will proceed according to the Non-Contentious Case Procedure Act.

Hana Bank explained, "The purpose is to seek the court's judgment on the authorities' decision." Earlier, Woori Bank had expressed its intention to contest the regulatory sanctions in a business report disclosed on March 30. Woori Bank stated in the report, "We have received the fine notification related to DLF and plan to file an objection with the relevant administrative agency."

The reason the two banks are opposing the financial authorities' decision is that they consider the fines and sanctions related to DLF excessive. However, looking deeper, in Woori Bank's case, it seems to support the ongoing CEO disciplinary action lawsuit filed by Sohn Tae-seung, Chairman of Woori Financial Group. Hana Bank is also interpreted as hoping to alleviate the burden of a potential administrative lawsuit by Ham Young-joo, Vice Chairman of Hana Financial Group. If the banks only sought a reduction in fines, they could receive a 20% reduction by paying the fine within 14 days of the notification. However, by exceeding this period and filing objections, it is highly likely that Vice Chairman Ham's administrative lawsuit will naturally follow. According to the Administrative Litigation Act, Ham can file an administrative lawsuit within 90 days from March 5, when the FSS's disciplinary warning took effect, until June 3.

Conflicts continue over the KIKO compensation recommendation plan. Shinhan, Hana, and Daegu Banks requested an extension of the deadline to respond to the acceptance of the recommendation on the 6th. This is the fifth extension request. According to the compensation plan, Shinhan Bank must compensate 15 billion KRW, Hana Bank 1.8 billion KRW, and Daegu Bank 1.1 billion KRW to affected companies. Previously, KDB Industrial Bank (2.8 billion KRW) and Korea Citibank (600 million KRW) decided not to accept the compensation plan. These banks judged that the Dispute Mediation Committee's finding of a breach of explanation obligations could be legally contested based on factual grounds. Only Woori Bank accepted the FSS mediation and completed compensation of 4.2 billion KRW. The banking sector has not accepted the KIKO compensation recommended by the FSS Dispute Mediation Committee since December last year, fearing breach of trust and other issues. They believe the statute of limitations for legal responsibility regarding KIKO compensation, which dates back over ten years, has already expired. In fact, KIKO was ruled by the Supreme Court in September 2013 as "not fraud." Although more than five months have passed since the FSS dispute mediation results, the resolution of the issue appears to be prolonged.

The FSS's preemptive compensation pressure regarding losses from Lime Asset Management funds is also a burden. The FSS stated that the compensation plan is a decision made independently by the sellers, but some voices complain that FSS Governor Yoon Seok-heon is pressuring by repeatedly stating that preemptive compensation is a private settlement and not breach of trust, and by demanding submission of preemptive compensation plans. Furthermore, as the so-called 'Bad Bank' to resolve Lime Asset Management's bad funds is about to launch, last-minute struggles are occurring over details such as investment ratios and amounts. Although Governor Yoon pledged the 'Bad Bank' would be established in May, there is a possibility of delay.

A financial sector official said, "Even as financial companies are busy supporting affected businesses and small merchants due to the COVID-19 crisis, Governor Yoon recently criticized financial companies for refraining from expanding their scale and pursuing high profits," adding, "Governor Yoon, who vowed to fight for consumer protection, still regards financial companies as adversaries. Meanwhile, an FSS team leader who was dispatched to the Blue House was arrested for involvement in the Lime incident, so internal discipline should be corrected first."

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