[Song Seungseop's Financial Light] After Reading the DLF 2nd Trial Verdict... Financial Supervisory Service Completely Defeated by Sohn Tae-seung

Financial Supervisory Service and Sohn Tae-seung DLF 2nd Trial Verdict Examined
FSS Completely Defeated, Even Claims Recognized in 1st Trial Overturned
Controversy Over 'Product Selection Committee Internal Control Regulations'
Court: "Deviations Not Directly Related to Regulations"

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[Asia Economy Reporter Song Seung-seop] The second round of the lawsuit between the Financial Supervisory Service (FSS) and Sohn Tae-seung, Chairman of Woori Financial Group, ended on the 22nd. The trial began when Chairman Sohn filed an administrative lawsuit seeking to cancel the FSS’s disciplinary action against him, claiming it was unfair. The result was that Chairman Sohn won in the second trial as well as the first. Moreover, all of the FSS’s claims that were partially accepted in the first trial were overturned. What was the reason?

The background of the lawsuit involves the overseas interest rate-linked derivative-linked fund (DLF) product. DLF is a highly risky private fund product. At the time, it was promoted as having almost no principal loss, but it caused damage to many financial consumers. The FSS imposed a ‘warning for reprimand’ disciplinary action on Chairman Sohn, then the bank president, stating that there was an incomplete sales process when Woori Bank launched and sold the DLF product. In response, Chairman Sohn filed a lawsuit in March 2020 seeking to cancel the disciplinary action.

The FSS has argued since the first trial that there was no problem with the disciplinary action. They presented five grounds for this: ① Lack of standards for omitting product selection procedures ② Lack of standards related to post-sale risk management and consumer protection tasks ③ Lack of standards related to the operation of the product selection committee ④ Lack of standards related to the suitability reporting system ⑤ Lack of a system to check compliance with internal control standards.

Although written in difficult terms, it can be simply summarized as ‘failure to establish internal control standards’ and ‘failure to establish a system to check them’. Internal control refers to the procedures and norms that all members of a company must follow. Banks are required to have stricter internal controls because money flows in and out. Since internal controls were not properly established, high-risk products like DLF were involved in incomplete sales, causing significant consumer damage.

However, the court did not accept four of the five grounds presented by the FSS, stating that they ‘misinterpreted the law.’ Currently, the ‘Financial Company Governance Act’ imposes an obligation to establish internal control standards, but failure to comply with these standards cannot be sanctioned. The court viewed the FSS’s interpretation that ‘internal control standards were not established’ as incorrect, even though problems arose from not following the internal control standards.

What is noteworthy is that the FSS’s grounds were partially accepted in the first trial. This corresponds to ③ ‘lack of standards related to the operation of the product selection committee’. Banks must go through a ‘product selection committee’ before launching high-risk products. However, Woori Bank only created the product selection committee but omitted most of the core deliberation and resolution regulations, which are essential for decision-making procedures. It was pointed out that this omission prevented the exposure of various manipulation and forgery incidents that occurred in Woori Bank’s product selection committee.

The FSS’s claims accepted in the first trial were “not accepted” in the second trial

However, in the second trial, the court overturned the first trial’s ruling, stating that the third ground was also incorrect. The court held that the release of the DLF product due to manipulation and forgery should be seen as a deviation occurring during the internal control process. The court stated, “The fact that a product that should have been rejected due to manipulation or forgery was released is a case of deviation occurring during the operation of internal control standards,” and “it is difficult to see it as directly related to the regulations.” Regarding Woori Bank’s fund guidelines, the court said, “It should be regarded as including matters related to the work procedures that must be followed.”

In particular, the court sided with Chairman Sohn on the ‘method of notifying the results of the product selection committee,’ which was a point of contention between both sides. Woori Bank’s product selection committee regulations did not include a ‘rule for notifying the final results to the committee members.’ Because of this, the FSS claimed that the committee members did not notice the manipulation and forgery. However, the second trial court stated, “If the final result is approval, even if the opposing committee members were notified, it is difficult to think there is a problem with the voting result,” and viewed the presence or absence of such a rule as irrelevant.

The court maintained the same position as the first trial on the remaining issues. Although problems occurred due to failure to properly comply with internal control standards, the problems were not caused by failure to establish internal control standards. Nevertheless, the court judged that the FSS’s misinterpretation of the law, equating failure to establish internal control standards with the failure to comply, and imposing sanctions, was incorrect. The court’s summary conclusion is as follows.

"As seen above, Woori Bank included various statutory matters in its regulations. The violations ①~⑤ pointed out by the FSS are minor and detailed. Chairman Sohn could not have easily foreseen that these internal control deficiencies would affect the DLF financial accident when establishing internal control standards. These deficiencies alone do not mean that the legal matters were substantially flawed or that effective internal control standards were not established. There were violations of compliance with internal control standards and operational errors, which expanded the damage. However, sanctions cannot be imposed on the grounds that internal control standards themselves were not established. Therefore, this disposition is illegal and must be canceled."

Having had even the third ground accepted in the first trial overturned, the FSS must decide whether to appeal. The FSS stated, “We respect the judgment of the second trial court,” and “After carefully reviewing the judgment, we plan to consult with the Financial Services Commission and others to determine our future position.”

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