'Disciplinary Absolutism' at the Financial Supervisory Service... Financial Firms Treading Carefully

475 Financial Institution Sanctions Last Year
36% Increase Compared to Previous Year
After Governor Yoon Seokheon’s Appointment
Rise in Severe Penalties Including Institutional Warnings

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Since Yoon Seok-heon took office as the Governor of the Financial Supervisory Service (FSS), penalties against financial companies have become significantly harsher. As the FSS’s scrutiny increasingly targets the CEOs of financial companies, concerns are rising that the agency is leaning toward a ‘punitive omnipotence’ approach, attempting to solve all problems through punishment.

According to the FSS’s disciplinary disclosures on the 18th, the number of sanctions against financial companies last year was 475, a 36% increase from 348 cases the previous year. By the standards of the past decade, this is the second-highest figure after 489 cases in 2015, when the FSS officially abolished comprehensive inspections. Considering that the abolition of comprehensive inspections forced the agency to rely more on disciplinary measures, the sharp increase in sanctions is notable.

In particular, severe disciplinary actions against executives, including institutional warnings, have surged since Governor Yoon’s appointment. From 2018 to this year, there have been 58 institutional warnings and 160 severe disciplinary actions such as reprimands or higher against CEOs and executives.

The levels of sanctions against financial company executives are divided into five stages: dismissal recommendation, suspension of duties, reprimand, cautionary warning, and caution. Among these, reprimand, suspension of duties, and dismissal recommendation are considered severe disciplinary actions. Once a suspension of duties is confirmed, the executive cannot be re-employed in the financial sector for 3 to 5 years after their current term ends.

The period with the highest number of severe disciplinary actions during past governors’ tenures was under Governor Kwon Hyuk-se. From 2011 to 2012, there were 54 institutional warnings and 177 severe disciplinary actions, largely due to the savings bank crisis triggered by real estate project financing (PF) loans in 2011.

During Governor Choi Soo-hyun’s tenure (2013?2014), there were 59 institutional warnings and 137 severe disciplinary actions; under Governor Jin Woong-seop (2015?2017), 37 institutional warnings and 68 severe disciplinary actions; and under Governor Choi Heung-sik (2017), 23 institutional warnings and 42 severe disciplinary actions. The severity of disciplinary actions had been steadily decreasing.

Last year, the number of sanctions was relatively high due to the private equity fund scandal, but the problem lies in the fact that this has led to situations that break established principles.

Financial companies are tactically making compensation payments to reduce disciplinary severity. To avoid severe disciplinary actions, financial companies are compelled to make compensation payments even if it means violating legal conclusions or the principle of investor self-responsibility, creating and entrenching a problematic structure.

[Image source=Yonhap News]

Dispute Resolution Committee Ignores Law and Principles... Financial Companies Tactically Compensate

In particular, regarding the Lime scandal, it is known that the FSS’s Disciplinary Review Committee cited ‘insufficient efforts in post-incident management and consumer damage recovery’ as reasons for severe disciplinary actions against securities firms, banks, and CEOs who sold Lime funds. There is growing analysis that this is an indirect message from the FSS promising to reduce disciplinary severity if financial companies engage in private settlements, including preemptive compensation to investors.

Sohn Tae-seung, Chairman of Woori Financial Group, who received a suspension of duties, agreed 100% to the demands of the Dispute Resolution Committee at the board meeting, and Shinhan Bank, whose CEO Jin Ok-dong received a reprimand, also consented to the initiation of dispute resolution procedures.

Similarly, in disputes such as the KIKO (Knock-In Knock-Out) case and the statute of limitations on suicide insurance benefits, after court rulings were made, the Dispute Resolution Committee issued decisions contrary to the courts’ judgments and then pressured financial companies, repeating the same pattern.

Within the financial sector, there are concerns that holding only the sellers responsible for compensation without identifying the fundamental causes of financial accidents could undermine the market order itself. Kim Kwang-soo, Chairman of the Korea Federation of Banks, recently pointed out, “The supervisory authorities’ disciplinary actions seem to diverge from the principle of clarity, which is the basic stance of the Ministry of Government Legislation and the courts, and increase uncertainty, posing a significant risk of stifling business activities.”

A financial industry insider said, “The current stance of the authorities is that if financial companies do not comply with their decisions, sanctions will be imposed. While consumer protection is obviously important, the fundamental role of financial authorities is to prioritize financial order and principles.”

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