Severity and Effective Date of 'DLF Sanctions', Ultimately in the Hands of the Financial Services Commission?

The Financial Services Commission Holds the Authority to Interpret Sanction Laws
Conclusion Possible at the 3rd Sanction Review on the 30th

[Asia Economy Reporter Kim Hyo-jin] The final decision on the level of sanctions against banks and executives related to the 'DLF incident' is expected to ultimately rest with the Financial Services Commission (FSC). This is because the FSC holds the authority to interpret the regulatory basis, namely the law.

According to financial authorities on the 23rd, the Financial Supervisory Service's (FSS) Sanctions Review Committee, which is currently reviewing sanctions against Sohn Tae-seung, Chairman of Woori Financial Group, Ham Young-joo, Vice Chairman of Hana Financial Group, Woori Bank, and KEB Hana Bank in connection with losses from overseas interest rate-linked derivative-linked funds (DLF), consists of a total of nine members: four ex officio members including FSC officials and five civilian members.

Among the four ex officio members, three are from the FSS excluding the FSC's share. Although the principle of the review is for the nine members to make decisions based on deliberations grounded in facts and law, the consensus in the financial sector is that the voices of the FSC members inevitably carry significant weight in practice.

A financial sector official familiar with the sanctions review said, "The FSC members represent the views of the FSC," adding, "Since the FSC's judgment is likely to influence other members, it is difficult to regard the FSC members as just one out of nine."

The authority to interpret various laws that serve as the basis for the FSS's supervisory activities lies with the FSC. The main issue in the 'DLF sanctions review' is the Financial Company Governance Act, which stipulates that "financial companies must establish internal control standards," and the Enforcement Decree, which specifies that "effective internal control standards must be established."

It is highly likely that the FSC will be the first to determine what exactly constitutes "internal control standards," the extent to which these standards are considered "effective," and whether the internal control standards of the two banks align with the intent of the law and the Enforcement Decree.

Last month, the FSS gave prior notice to Chairman Sohn and Vice Chairman Ham of the possibility of a severe disciplinary action, namely a written warning. A financial sector official said, "From the FSS's standpoint, this was essentially an expression of intent to impose the highest level of sanctions," adding, "If a sanction lower than a written warning is decided, it could be seen as reflecting the FSC's intentions more significantly."

The timing of the enforcement of sanctions also depends on the FSC's decision-making. In the case of Woori Bank, the timing is particularly sensitive due to Chairman Sohn's reappointment issue. Regardless of the possibility of raising objections through judicial procedures in the future, sanctions against executives are confirmed once the Sanctions Review Committee passes a resolution and the FSS Governor approves it.

If severe sanctions against institutions (banks) are decided in the sanctions review, the agenda must be submitted to the FSC for resolution. The effect of the sanctions takes place when the parties receive the inspection report notification from the FSS.

The FSS plans that if a situation arises where severe sanctions are decided against the banks, it will not separately notify the executives first but will wait for the FSC's resolution on the banks and notify them simultaneously. An FSS official explained that this approach is based on usual practice and operational efficiency.

Meanwhile, on the 22nd, the FSS held the second sanctions review hearing to listen to the defense and explanations from Chairman Sohn and Woori Bank. During the first sanctions review, the defense procedures for Vice Chairman Ham and KEB Hana Bank lasted about nine hours, leaving insufficient time for Chairman Sohn and Woori Bank to present their explanations. The FSS will hold the third sanctions review on the 30th, where the level of sanctions may be decided.