DLF Sanctions, Lime Investigation, and Comprehensive Inspections? Woori and Hana Bank on High Alert

'Consumer Protection Focus' High-Intensity Inspection Expected
Concerns Over 'Punitive Inspections' Amid Various Controversies

[Asia Economy Reporter Kim Hyo-jin] The Financial Supervisory Service (FSS) will decide next month whether to conduct a comprehensive inspection of Woori Bank and Hana Bank. These banks, which were sanctioned due to the overseas interest rate-linked derivative-linked fund (DLF) scandal, are once again under investigation by the FSS regarding allegations of incomplete sales of Lime Asset Management's private equity funds. This investigation could also lead to a sanction-based inspection. If a comprehensive inspection is conducted, the banks will be exposed to unprecedentedly strong all-around pressure, raising their concerns.

According to financial authorities and the financial sector on the 18th, the FSS plans to finalize this year's comprehensive inspection schedule for major financial holding companies and banks as early as next month. The inspections will be conducted sequentially, divided into the first and second halves of the year, according to the finalized schedule. Since last year until recently, the FSS has conducted comprehensive inspections of KB Financial Group and KB Kookmin Bank, as well as Shinhan Financial Group and Shinhan Bank. Woori Financial Group and Woori Bank, Hana Financial Group and Hana Bank, SC First Bank, and Korea Citibank are subject to comprehensive inspections this year.

Attention is focused on Woori and Hana Banks. Due to the CEO disciplinary actions related to the DLF scandal, anticipated future legal disputes, and investigations into allegations of incomplete sales of Lime funds, they are in a tense relationship with the FSS. Since both the DLF and Lime incidents caused damage to financial consumers, there is a strong expectation that the comprehensive inspection will be particularly stringent. The FSS declared its commitment to intensively inspect financial companies' business practices to protect consumers and establish fair trading order through the '2020 Inspection Work Operation Plan' released last month. It also carried out an organizational restructuring to significantly expand consumer protection functions.

A financial sector official said, "If a comprehensive inspection is conducted, the focus will be on consumer protection areas such as internal control systems related to business practices," adding, "The ongoing Lime-related investigation or future inspections will not significantly affect whether or when the comprehensive inspection is conducted."

The FSS had effectively abolished comprehensive inspections since 2015 but revived them after Yoon Seok-heon took office as governor in 2018. The banking sector worries that the FSS's comprehensive inspections might take on the character of 'punitive inspections' due to various controversies. There are also concerns about business disruptions caused by high-intensity inspections. A banking sector official expressed concern, saying, "The inspection process itself can be completed in one to two months, but follow-up procedures based on the inspection results can last from several months to several years."

Meanwhile, regarding the Lime scandal, the first targets of the joint on-site investigation to be conducted by the FSS next month include Lime Asset Management, along with Woori Bank, Hana Bank, and Shinhan Investment Corp. The FSS plans to thoroughly examine allegations of incomplete sales by these distributors during the on-site investigation.