The Financial Supervisory Service to Conclude On-Site Inspection of Shinhan Securities This Week... Severe Disciplinary Action Inevitable

원본보기 아이콘

The Financial Supervisory Service (FSS) is expected to complete its on-site investigation into Shinhan Investment Corp.'s exchange-traded fund (ETF) loss incident as early as this week. Last week, during a capital market briefing, the FSS pointed out serious issues with Shinhan Investment Corp.'s internal controls and hinted at the possibility of severe disciplinary action.

The key issue is whether Kim Sang-tae, CEO of Shinhan Investment Corp., will face disciplinary measures. Since the Financial Company Governance Act is currently in a pilot operation phase and securities firms are not yet required to submit a responsibility structure, it is considered difficult to impose discipline. Accordingly, there is speculation that his position will depend on the year-end personnel reshuffle.

According to financial authorities on the 6th, the FSS's Financial Investment Inspection Division 2 extended the on-site inspection of Shinhan Investment Corp. once and is now conducting the final inspection. An FSS official stated, "If necessary matters related to internal controls arise, additional inspections may be conducted, but we plan to complete the inspection as early as this week."

원본보기 아이콘

Inside and outside the financial authorities, there is a high expectation of severe disciplinary action against Shinhan Investment Corp. The consensus is that there are significant problems in the design and operation of internal controls. On the 1st, Ham Yong-il, Deputy Governor of the FSS's Capital Market Division, said during a briefing on capital market issues, "There are obvious problems with individuals, and organizational issues are also very serious," adding, "Shinhan has exposed serious problems in both vertical and horizontal controls."

First, the FSS views that the risk management group failed to control issues in sales and trading, indicating problems with horizontal internal control functions. An FSS official said, "Each securities firm has different risk management regulations, but there are limits on individual and daily trading loss amounts. When a certain loss amount is exceeded, trading is stopped and reported, and Shinhan Investment Corp. must answer for this issue."

In particular, the fact that false reports were submitted is not accepted by regulators. The FSS pointed out, "There were cases of document falsification, and the methods of concealment were very poor." If team leaders and department heads knew about the losses and agreed to false reporting, it means there is a major gap even in vertical controls.

Deputy Governor Ham's remark during the briefing that "individual punishments will be very severe, and since there are significant problems in the design and operation of the organization's (internal control) system, the punishment must be as strong as possible" is in this context. However, it is unlikely that the internal control inspection will be expanded to Shinhan Financial Group. The FSS maintains that this case is different from the Lime Fund scandal.

원본보기 아이콘

The key issue is whether the CEO will be disciplined. Since the amendment to the Financial Company Governance Act took effect in July, financial companies are required to submit a "responsibility structure" to financial authorities. The responsibility structure is a system that pre-identifies the ultimate person responsible for major financial company operations to prevent delegation of internal control responsibilities downward.

Therefore, if internal control problems occur in securities firms, the CEO cannot avoid responsibility. However, the law is not easy to apply immediately. The financial authorities have specified a pilot operation period until January 2 of next year to facilitate early establishment of the system. Financial holding companies and banks have already submitted their responsibility structures to the authorities. The financial authorities have stated that they will not hold companies accountable under the Governance Act for internal control issues occurring during the pilot period.

In particular, there is criticism that there is little justification for disciplining the CEO even if internal control problems occur in securities firms. Securities firms must submit their responsibility structures by July next year. This means that if the CEO was not involved, the Governance Act cannot be applied. A senior FSS official said, "The Governance Act is operating ambiguously, and while there are precedents for applying it, the responsibility structure has not yet been submitted. From the CEO's perspective, this is a delicate time."

Moreover, it is fortunate for Shinhan Investment Corp. that this incident involved losses from proprietary trading. Proprietary trading involves trading with the securities firm's own capital, so there is no consumer damage. Futures losses are fully reflected as company operating losses.

For this reason, there is speculation that Kim Sang-tae, CEO of Shinhan Investment Corp., will have his position determined in the year-end personnel reshuffle. Kim was one of the executives who received special treatment along with Cho Jae-min, CEO of Shinhan Asset Management, in last year's year-end personnel changes. Generally, a one-year term is granted upon reappointment, but only these two broke the precedent and received a two-year extension. Although Kim's term remains, even if he is excluded from direct CEO sanctions, it is assessed that Shinhan Financial Group could hold him accountable for internal control failures at the group level.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.