Jo Yong-byeong Enters 'Phase 2 System', First Test: Lime and KIKO

Handling of Lime Incident, Crisis Management Ability and Consumer Protection Convictions Expected to Be Gauged by Acceptance of KIKO Compensation
Whether Shinhan Financial Investment Exercises Priority Repayment Rights or Concedes to Lime Management... Depends on Shinhan Financial Group's Decision

[Asia Economy Reporter Kwon Haeyoung] Cho Yong-byeong, chairman of Shinhan Financial Group, who has effectively secured his reappointment, has accepted 'consumer protection' as his first task for the second term. This involves resolving the Lime Asset Management incident, which caused significant losses to investors due to fund recycling, and the compensation issue related to the foreign exchange derivative product 'KIKO' that inflicted substantial damage on small and medium-sized enterprises during the 2008 financial crisis. Attention is focused on how to solve the equation involving conflicts of interest between shareholders and consumers and securing long-term trust in financial companies.

On the 28th, a financial regulatory official stated, "Once the loss amount is confirmed following the announcement of the Lime Asset Management due diligence results, the issue of exercising the priority repayment rights arising from total return swap (TRS) contracts by securities firms such as Shinhan Financial Investment will come to the forefront," adding, "Although this is a matter that financial authorities cannot intervene in, if securities firms decide to waive all or part of their rights in the interest of consumer protection, the scope of relief for general investors will expand."

Among the Lime Asset Management funds that suspended redemptions, the trade finance fund amounts to 600 billion KRW. Previously, Shinhan Financial Investment lent 360 billion KRW to this fund through TRS contracts. The problem is that 240 billion KRW of this is virtually unrecoverable. If Shinhan Financial Investment exercises its priority repayment rights on the 360 billion KRW loan, the portion available to general investors disappears. This represents a direct conflict between shareholder interests and consumer interests.

Shinhan Financial Group stated, "We will discuss response measures, including whether to exercise priority repayment rights, after the due diligence results are released." While some in the financial sector believe that exercising priority repayment rights is Shinhan Financial Investment's rightful claim, at the group level, there is concern that the Lime Asset Management incident could highlight the responsibility of the entire group, including Shinhan Financial Investment, Shinhan Bank, and Shinhan Financial Group's internal controls. The Financial Supervisory Service suspects Shinhan Financial Investment's involvement in Lime Asset Management's fraud, and to make matters worse, it was recently revealed that some of the 270 billion KRW in Lime Asset Management Credit Insured (CI) funds sold by Shinhan Bank were arbitrarily funneled into non-performing funds that suspended redemptions. Notably, Shinhan Financial Group's exposure to Lime Asset Management risk totals 1.1242 trillion KRW, the largest among financial holding companies. The group cannot ignore the reputational risk involved.

KIKO compensation is also one of Chairman Cho's major issues. Although it depends on the decisions of Shinhan Bank's management and board of directors, it is an issue that cannot be overlooked at the group level. Shinhan Bank's KIKO compensation amount, combining the Financial Supervisory Service's dispute mediation and voluntary adjustment amounts, totals 55 billion KRW, the highest among domestic banks. As KEB Hana Bank and Woori Bank have effectively agreed to accept the Financial Supervisory Service's compensation recommendations, this could be a burden for Shinhan Bank. Due to the expiration of the legal statute of limitations and concerns about potential breach of trust, opposition from outside directors is strong, making board approval challenging.

A financial industry insider said, "The financial sector is paying close attention to how Chairman Cho will handle the issues he faces after effectively securing his reappointment following a suspended sentence for hiring irregularities," adding, "Since the Lime incident and KIKO compensation involve consumer protection, risk management, and reputational issues, Chairman Cho's convictions, philosophy, and crisis management capabilities will be put to the test."