'Double the Workforce' High-Intensity Audit... Frozen Financial Supervisory Service

Board of Audit and Inspection, Financial Supervisory Service Begin Weekday Operational Audits
Main Targets Include Management and Sanction Procedures for DLF Incident
Heightened Attention Amid Court Criticism of 'Excessive Sanctions'
Concerns Over Disruption to Financial Consumer Protection Policy Implementation

[Asia Economy Reporter Kim Hyo-jin] The Financial Supervisory Service (FSS) is experiencing heightened tension ahead of the high-intensity audit by the Board of Audit and Inspection (BAI) scheduled for this week. A microscopic audit is anticipated covering the overall management, supervision, subsequent inspections, and sanction procedures related to the overseas interest rate-linked derivative-linked funds (DLF) that caused principal loss incidents, the Lime Asset Management scandal, and other related issues.

In particular, regarding the DLF case, the court has pointed out the possibility of abuse of authority concerning the heavy disciplinary actions imposed by the FSS on the CEOs of financial companies, prompting the FSS to be on high alert. There is also interest in how various complaints of a whistleblower nature, received from financial companies about the FSS’s supervisory actions, will influence this audit.

According to the government and financial circles on the 29th, the BAI will begin the main institutional operation audit of the FSS around the 1st of next month. Institutional operation audits are a type of regular audit conducted every two to three years. This will be the first institutional operation audit of the FSS in over three years since March 2017.

The BAI had originally planned to conduct the audit in March or April but postponed it due to the impact of the COVID-19 pandemic. Based on the preliminary audit results conducted in writing from last month through this month, following an earlier round earlier this year, the BAI recently completed preparations such as setting the specific scope of the main audit. Approximately 20 personnel will be deployed for this audit, a significant increase compared to the usual deployment of around 10 personnel.

The BAI plans to closely examine how much the FSS was aware of the problems in advance regarding the financial accidents that occurred consecutively starting with the DLF incident, and whether the preventive measures were appropriate. It will also review whether the follow-up procedures, such as sanctions that have already been completed or are underway, were carried out within the scope of authority.

In this context, Sohn Tae-seung, Chairman of Woori Financial Group, and Ham Young-joo, Vice Chairman of Hana Financial Group, who received heavy disciplinary warnings related to the DLF incident, have filed provisional injunctions requesting suspension of the sanctions and administrative lawsuits seeking cancellation of the sanctions at the Seoul Administrative Court.

In March, the court accepted Chairman Sohn’s provisional injunction, stating, "The authority to issue disciplinary warnings to executives of financial companies other than mutual savings banks still lies with the Financial Services Commission." This implies that the FSS’s sanctions could be considered an 'overreach' of authority.

A financial industry official said, "The court’s initial judgment is expected to influence the BAI audit as well," adding, "However, since the court is already conducting hearings on the matter, it may take some time before a final conclusion is reached."

It is also noteworthy that the BAI sought opinions from individual financial companies before the audit. Earlier this year, the BAI requested direct reports related to improvements in the FSS supervisory system from financial companies through various financial associations. It is unusual that the BAI opened a direct reporting channel for individual financial companies without going through the associations as it began preparing for the institutional audit.

The BAI is known to have collected numerous reports through both the associations and the direct reporting channel. A senior financial industry official hinted, "There were many reports not only on a macro-level institutional basis but also of a minor complaint nature."

From the FSS’s perspective, which was embroiled in controversy due to the inspection by the Blue House’s Civil Affairs Office and delays in appointing a deputy governor, this audit may carry significance beyond a simple audit. There are also forecasts that it could be more uncomfortable than the 2017 audit, which raised issues such as recruitment irregularities of some executives and employees’ nominee stock trading.

An FSS official cautioned against overinterpretation, saying, "There is no basis to link the Blue House’s inspection or personnel issues to this audit," and "This audit was a procedure scheduled long ago, so we will simply carry it out faithfully according to principles."

Some express concerns that this audit could excessively shake the FSS. A financial industry official pointed out, "Although the appointment of the deputy governor was somewhat delayed, it should be seen as a reaffirmation by the government and the Blue House of Governor Yoon Seok-heon’s focus on financial consumer protection," adding, "There should be no hindrance to the ongoing implementation of various consumer protection policies."

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