Yoon Seok-heon, Financial Supervisory Service Chief, to Hold a 'Very Uncomfortable' Meeting with Heads of 5 Major Holding Companies Next Week

All Major Financial Holding Companies Expose Consumer Protection and Internal Control Flaws... Supervisory Authorities' Responsibility Highlighted
Despite Emphasizing Internal Control... Governor Yoon and Holding Company Chairmen Anticipate Awkward Meeting

[Asia Economy Reporter Kwon Haeyoung] Yoon Seokheon, Governor of the Financial Supervisory Service (FSS), will meet with the chairmen of the five major financial holding companies for the first time this year. All major financial holding companies are currently under close watch by the FSS due to internal control deficiencies within their affiliates, making this meeting expected to be the most uncomfortable gathering so far.

According to the financial sector on the 18th, Governor Yoon will meet next week with the chairmen of the five major holding companies: Shinhan, KB, Hana, Woori, and NH Nonghyup Financial. This is the first meeting of the year. Kim Dongseong, Deputy Director in charge of banking at the FSS, will also attend.

A financial sector official said, "Currently, there is no financial holding company free from consumer protection or internal control defects, and especially Woori and Hana Financial are affected in their governance due to sanctions related to derivative-linked funds (DLF)." He added, "Usually, sensitive issues are not mentioned in meetings, but this time, related topics might come up, so all the holding company chairmen will feel like they are sitting on a bed of nails."

The person expected to feel the most awkward face-to-face with Governor Yoon is Sohn Tae-seung, Chairman of Woori Financial Group (and CEO of Woori Bank). Chairman Sohn received a severe disciplinary warning from the FSS’s sanction review committee for the incomplete sales of DLFs that caused massive losses to investors. Due to this sanction, he cannot be reappointed after his term expires in March, but he has announced plans to file an administrative lawsuit, opposing the FSS. In fact, within the FSS, a 'serious' atmosphere toward Woori Financial is sensed. They plan to bring the unauthorized password change incident at Woori Bank to the sanction review committee immediately.

Shinhan Financial Investment, at the center of the Lime Asset Management scandal that caused losses to investors through fund rollovers, is also uneasy. The FSS inspection confirmed that Shinhan Financial Investment manipulated returns arbitrarily and sold the Lime-operated trade finance fund, which had suspended redemptions, to investors as if it were a normal fund, even after recognizing its insolvency. Shinhan Financial operates a matrix system where the holding company, bank, and securities collaborate in the wealth management (WM) sector.

Hana Financial is also on a bed of nails, appearing repeatedly in consumer protection and internal control deficiency issues, from the DLF to the Lime scandal. KB Financial is not free from these issues either. Although KB Securities has belatedly started compensation, principal losses occurred due to fraud by the management company in the Australian real estate private equity fund previously sold. KB Kookmin Bank sold a large number of KOSDAQ leveraged exchange-traded funds (ETFs) as trust products to investors, and some investors reportedly suffered valuation losses exceeding 50%.

Since his inauguration in May 2018, Governor Yoon has been deeply concerned about the malfunctioning internal control functions of financial companies. Especially, he showed great interest in internal control by presenting innovation plans for the 'Financial Institution Internal Control Innovation Task Force (TF)' as his first achievement after taking office. However, with successive major financial accidents, the supervisory authority’s responsibility is being highlighted. A hearing by the National Assembly’s Financial Services Committee is scheduled for the 20th.

A financial sector official predicted, "Governor Yoon will likely urge the holding company chairmen to strengthen internal controls during this meeting. Both sides usually refrain from sensitive remarks, but this meeting will be more tense than ever."