Financial Supervisory Service's 'Severe Disciplinary Action on Lime Sales Firms'... Securities Firms Protest, Banks on Edge

[Asia Economy Reporters Koh Hyung-kwang and Kim Hyo-jin] Financial authorities are expected to face backlash from fund distributors after reportedly giving prior notice of severe disciplinary measures to the CEOs of fund distributors involved in the 'Lime Incident.' While distributors are keeping a low profile to minimize friction with financial authorities, they have begun internal discussions on future response strategies. Attention is focused on whether they will pursue legal action once the level of discipline is finalized.

According to financial authorities and the financial investment industry on the 7th, the financial firms that received disciplinary notifications from the Financial Supervisory Service (FSS) the day before are reportedly discussing future response plans mainly within their responsible departments. The FSS gave prior notice of disciplinary measures related to the Lime Incident to three distributors: Shinhan Financial Investment, KB Securities, and Daishin Securities. Although the exact level of sanctions has not been disclosed, it is reported that the notice involved severe disciplinary action beyond a warning.

With the sanctions from financial authorities now communicated, attention is also on how the distributors will respond going forward. The firms that received disciplinary notices are taking special care to keep internal information confidential, fearing misunderstandings if information is prematurely leaked. A representative from one securities firm that received the notice said, "It is true that the FSS delivered the disciplinary notice the day before," but added, "Since it is not something to boast about, only the responsible department is sharing and discussing the details, and other employees are completely unaware." Another securities firm representative also refrained from commenting, saying, "There is an internal atmosphere of silence to avoid misunderstandings that we are playing to the media if we say something wrong."

Given that financial authorities have proposed severe disciplinary measures, considerable resistance from distributors is expected. The securities industry, in particular, holds the view that there is no clear legal basis for disciplining CEOs in the Lime Incident. Currently, the amendment to the Financial Company Governance Act, which would provide grounds to sanction CEOs for internal control failures, is still pending in the National Assembly. The FSS itself has defined the case as one where Lime Asset Management and Shinhan Financial Investment colluded to conceal fund insolvency, yet distributors argue that they are being unfairly held responsible.

There are also expectations that the conflict pattern seen earlier this year during the disciplinary actions related to the Derivative Linked Fund (DLF) incident between the FSS and the banking sector will reemerge. Son Tae-seung, Chairman of Woori Financial Group and CEO of Woori Bank, and Ham Young-joo, Vice Chairman of Hana Financial Group (then CEO of Hana Bank during the DLF incident), filed administrative lawsuits and injunctions to suspend the disciplinary actions (warnings) imposed by financial authorities. If severe disciplinary measures are confirmed in the future, securities firms are expected to consider legal actions such as lawsuits, but some analysts believe this will not be easy as it could be interpreted as a willingness to engage in a full-scale confrontation with financial authorities.

Tensions are also rising among banks that sold Lime funds. This is because once the sanctions on securities firms are finalized, disciplinary procedures against banks are expected to follow soon after. Regarding this, Yoon Seok-heon, Governor of the FSS, told reporters on the 24th of last month, "We will first wrap up the securities firms and then move on to the banks," adding, "Although it is difficult to specify the timing, we plan to proceed consecutively."

Banks are taking a cautious stance for now. A bank official said, "We need to review the final disciplinary results for securities firms and examine various issues," adding, "Since the context is very complex, we are being careful." The official also expressed concern, saying, "Severe disciplinary actions against CEOs could cause significant damage to the governance and management structure of financial firms," and "It is worrisome that CEO disciplinary actions seem to be becoming a principle-like stance of the authorities."

The disciplinary procedures against banks are expected to begin as early as next month. Some speculate that, depending on the results, a legal battle similar to that between the FSS and securities firms could occur between the FSS and banks. The fact that Lime trade finance fund distributors have recently accepted the FSS's dispute resolution proposal for 'full principal compensation' and are actively pursuing victim compensation could also act as a variable in this situation.

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