FSS to Reduce Regular Inspections and Expand Ad-Hoc Inspections... Will KB's Inspection Be Delayed?

Growing Uncertainty in the Financial Sector Due to Backlog of Post-Inspection Actions
Ad-hoc Inspections to Expand with Focus on Pressing Issues
Some Banks May Skip Regular Inspections

The Financial Supervisory Service (FSS) will reduce the number of regular inspections of financial institutions in the first half of this year, while expanding ad-hoc inspections focused on pressing issues. This move is interpreted as an effort to resolve the backlog of follow-up actions that have accumulated after regular inspections and to enhance the efficiency of the inspection process. Within the financial sector, it is noted that, given the delays in sanction processing, it would be structurally challenging to conduct inspections simultaneously, raising the possibility that regular inspections for some banks may be postponed or skipped.

According to the financial sector on March 16, the FSS plans to operate its inspection system by reducing the number of regular (comprehensive) inspections for banks in the first half of this year and expanding ad-hoc inspections. This decision comes amid concerns that delays in the release of last year's regular inspection results are increasing uncertainty for financial institutions.

Instead, the FSS plans to increase the number of themes for ad-hoc inspections to ensure a level of oversight similar to regular inspections across the entire financial sector. The agency aims to minimize any gaps in supervision by conducting on-site inspections focused on key issues such as consumer protection, corporate governance, and internal controls.

An official from the supervisory authority stated, "A significant number of sanctions and follow-up actions have accumulated after regular inspections," adding, "In the first half of the year, we plan to concentrate as much as possible on processing these post-inspection actions, and we will enhance efficiency by expanding ad-hoc inspection themes focused on current issues."

Regular inspections, typically conducted every two to three years, comprehensively review the overall management of a given financial institution. These inspections involve a large team of 20 to 30 personnel and last about a month. They are also linked to management evaluations, resulting in highly intensive scrutiny. From the FSS's perspective, the goal is to produce meaningful results through thorough verification, which is why the process is so rigorous. Financial institutions, in turn, find these inspections the most burdensome.

On the other hand, ad-hoc inspections are conducted when a financial incident occurs or when a specific issue comes to the forefront. For example, topics such as the status of overseas stock investment sales, compliance with real estate loan regulations, or the sales process of specific financial products are selected, and institutions are chosen for inspection either by sector or by transaction volume. Sometimes, only a specific institution is targeted, but in other cases, multiple institutions are inspected simultaneously for the same issue.

The financial sector anticipates that, in line with recent government policy directions, ad-hoc inspections related to consumer protection, internal controls, and corporate governance are likely to be strengthened. A commercial bank official noted, "We believe that on-site inspections could take place across various areas, such as the protection of financially vulnerable groups, the operation of corporate governance, and the internal control system, so we are preparing internally."

However, there are concerns within the industry that ad-hoc inspections could be perceived as "targeted inspections." This is because unexpected inspections often focus on financial institutions where a specific incident or issue has occurred. BNK is a prime example. When an embezzlement case involving more than 300 billion won was discovered at BNK Kyongnam Bank, the FSS launched an emergency on-site inspection in July 2023 to review the bank's internal controls.

With the FSS announcing plans to first process the accumulated inspection results and sanctions during the first half of the year, there is also speculation that some regular inspections may be postponed. Both inside and outside the supervisory authority, it is explained that it is practically difficult to initiate new regular inspections before the previous inspection results and sanction procedures are finalized.

Given these circumstances, there is talk that the inspection schedule for some banks included in this year’s list of regular inspections may be adjusted. The FSS has selected KB Kookmin Bank, Jeonbuk Bank, and K Bank as targets for this year's regular inspections. It is known that this year's regular inspections will begin with Jeonbuk Bank in the first half of the year.

However, some banks have yet to receive notification of the results from previous regular inspections. For example, KB Kookmin Bank is reportedly still awaiting notification of the results of the regular inspection conducted in 2024. The FSS usually provides advance notice before initiating a regular inspection, but it is reported that KB Kookmin Bank has not yet received such notification.

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