Comprehensive Inspection by FSC to Start Next Month... First Targets Are Hana Financial Group and Banks

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[Asia Economy Reporter Kangwook Cho] Hana Financial Group and Hana Bank have become the first targets of this year's comprehensive inspection by the Financial Supervisory Service (FSS). The inspection, postponed due to the impact of the novel coronavirus disease (COVID-19), will unusually commence in August during the summer vacation period. This comprehensive inspection of Hana Financial Group and Hana Bank is expected to be a more meticulous and stringent 'pinpoint' inspection focusing on high-risk financial products, amid ongoing incidents such as the Lime, Discovery, and Optimus scandals.

According to financial authorities and the financial sector on the 21st, the FSS has designated Hana Financial Group and Hana Bank as the first targets for this year's comprehensive bank sector inspections. Currently, the FSS and Hana Financial Group are coordinating various matters related to the inspection ahead of the official prior notification, which is issued one month before the inspection begins.

Regarding the hot-button issue in the financial sector?the suspension of redemption in private equity funds?Hana Bank's suspected incomplete sales and inadequate internal controls are expected to be subjects of the inspection. Hana Bank is the distributor of Lime Asset Management's private equity funds, which triggered large-scale redemption suspensions, as well as the Italy healthcare fund, which is expected to incur losses. Additionally, in relation to the recent redemption suspension incident involving Optimus Asset Management, Hana Bank's role as a custodian will also be examined. It is known that Optimus Asset Management instructed Hana Bank, the custodian bank, to purchase non-performing bonds while simultaneously requesting the Korea Securities Depository to rename them as public institution sales bonds, thereby falsifying the fund statements. After completing the inspections of Hana Financial Group and Hana Bank, the FSS plans to conduct comprehensive inspections of Woori Financial Group and Woori Bank within this year.

This inspection is drawing attention because it is unusually conducted during the vacation season. Typically, the FSS's sector-specific inspection divisions conduct comprehensive inspections in April to May during the first half of the year and then take a break during the vacation period in July to August. Subsequently, they conduct second-half comprehensive inspections, inspecting two to three financial companies annually. However, this year is different. Although the first half of the year has passed, COVID-19 continues to show sporadic spread, making it impossible to predict when the infectious disease disaster alert level will be lowered. Due to the full-scale outbreak of COVID-19 starting in March, the FSS has not conducted any comprehensive inspections at any institution this year.

The FSS comprehensive inspection involves about 20 to 30 inspectors who work on-site at the financial institution under inspection for several weeks, conducting a thorough review of its operations. The inspection can take as little as one month or as long as three months. However, the FSS is currently facing a shortage of personnel due to various private equity fund investigations. In fact, the 'Dedicated Inspection Team for Professional Private Equity Fund Managers,' launched to conduct a full survey of approximately 10,000 private equity funds over three years, includes only 20 FSS personnel, supplemented by 10 dispatched staff from related organizations such as the Korea Deposit Insurance Corporation, Korea Securities Depository, and Korea Securities Finance Corporation. Consequently, in the financial sector, there is a prevailing view that, given the private equity fund issues, the inspection will be more detailed and the inspection period for a single financial institution will be longer than usual. The comprehensive inspection mobilizes most of the inspection department's personnel, and considerable time is also required for follow-up work after the inspection ends.

Some predict that the workload for financial institutions will significantly increase. Once selected for a comprehensive inspection, the FSS demands a massive volume of documents even before the inspection begins, to the extent that operations are virtually paralyzed. Especially amid the increased workload due to financial support measures related to the COVID-19 crisis, financial institutions now face the additional burden of undergoing comprehensive inspections. There are also concerns that frequent visits by outsiders could cause problems with quarantine measures. Within the financial sector, there is growing discontent, with voices saying, "Management conditions are already tough due to COVID-19, but the FSS is adding to the burden with comprehensive inspections."

Alongside this, starting next month, the FSS plans to conduct mystery shopping inspections on the sales of financial products such as funds, derivative-linked securities, over-the-counter derivatives, and variable insurance. Mystery shopping is a system where FSS employees or employees of firms commissioned by the FSS pose as customers to covertly check whether financial companies are properly selling financial products.

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