[Column] Financial Supervisory Service's Self-Denial

[Asia Economy Reporter Kim Min-young] The Financial Supervisory Service (FSS) has contradicted itself. In the ‘20-Year History of the Financial Supervisory Service’ published last December, the FSS praised itself for shifting the focus of sanctions against financial companies from personnel sanctions such as disciplinary actions against executives and employees to monetary sanctions such as fines and penalties. It also clearly stated that this direction aligns with the supervisory approaches of advanced countries like the United States. However, recent disciplinary actions against executives and employees of Hana Bank and Woori Bank have drawn criticism for contradicting this so-called ‘advanced sanction system.’

In the 20-year history, the FSS wrote, “We have continuously improved the system to establish financial order and ensure the accountability of financial companies without restricting their autonomy and creativity.” It added, “Until the mid-2000s, sanctions were mainly based on personnel sanctions against executives and employees, but due to criticism that this encouraged self-protective work behavior among financial company staff, we shifted to monetary sanctions such as fines.”

The self-praise regarding the advancement of sanctions continues. The FSS stated, “Since 2004, we have improved the system to actively utilize non-punitive measures aimed at voluntary improvement by financial companies, such as obtaining commitment letters and signing memorandums of understanding (MOUs), rather than imposing punitive sanctions for managerial weaknesses identified during inspections.” It also noted, “In 2016, the system was improved to allow obtaining commitment letters or signing MOUs even for regulatory violations.”

Market insiders are puzzled. This is because the recent disciplinary actions taken by the FSS in response to the overseas interest rate-linked derivative-linked fund (DLF) scandal are completely different. Of course, when serious violations occur, the FSS must impose strict sanctions such as business suspension or recommending the dismissal of the CEO. The DLF scandal caused significant damage, including principal losses for victims.

The problem lies in the disciplinary process. When imposing sanctions that could change the governance structure of a financial company, transparency and fairness must be guaranteed. Despite criticism that the disciplinary rationale is vague, the authorities pushed through with severe sanctions. Current laws only stipulate sanctions for financial companies that have ‘not established’ internal control standards, but there is no legal basis for sanctions related to control deficiencies or poor operations. Ultimately, concerns arise that the financial authorities may selectively apply sanctions at their discretion depending on the case. A financial industry insider pointed out, “The idea of shifting from personnel sanctions to monetary sanctions has been around for years, but this time the FSS revived the very practices it criticized.” This is why the FSS’s self-praise about ‘advanced sanctions’ in the 20-year history sounds like self-contradiction regarding disciplinary improvements.