Rhyme Fund Sales Bank Sanctions Intensify... Banking Sector Claims "Unfair High-Intensity Additional Punishments" (Comprehensive)

Starting with IBK on the 28th, Sanctions Review Committee to be Held
High-Intensity Sanctions Expected Like with Securities Firms
Banking Sector "Cannot Accept Additional Penalties"

[Image source=Yonhap News]

[Asia Economy Reporters Kwangho Lee, Sunmi Park] As financial authorities have officially announced sanctions against banks that sold private equity funds such as Lime and Discovery, the banking sector is on high alert. Since most former and current CEOs of securities firms that sold Lime funds last November received severe disciplinary actions such as suspension of duties and institutional warnings, it is widely expected that financial authorities, mindful of fairness and public opinion from victims, will impose strict disciplinary measures on bank presidents.

According to the financial sector on the 25th, the Financial Supervisory Service (FSS) will hold disciplinary review committees for a total of eight banks that sold private equity funds, starting with Industrial Bank of Korea on the 28th. Industrial Bank of Korea sold approximately 679.2 billion KRW worth of Discovery funds from 2017 to 2019. However, the U.S. asset manager failed to recover bonds invested with the fund's capital, causing a delay in redemption of 91.4 billion KRW. Industrial Bank of Korea also sold Lime funds worth about 29.4 billion KRW.

The FSS plans to initiate disciplinary reviews for Woori, Shinhan, KDB, Busan, and Hana Banks within the first quarter.

An FSS official stated, "We plan to begin the sanction procedures against banks that sold defective private equity funds starting this week." The levels of sanctions by the authorities are fivefold: caution, cautionary warning, disciplinary warning, suspension of duties, and recommendation for dismissal. Disciplinary warnings and above are classified as severe sanctions. If a bank head receives a sanction of disciplinary warning or higher, they face restrictions on reappointment and, in principle, are barred from employment in the financial sector for 3 to 5 years from the time of sanction.

On the 13th, in front of the Financial Supervisory Service in Yeongdeungpo-gu, Seoul, members of the National Private Equity Fund Fraud Victims Joint Countermeasures Committee held a rally urging dispute mediation to protect victims. Photo by Moon Honam munonam@

Banking Sector: "If All Responsibility Is Shifted to Sellers, Private Equity Fund Sales Will Inevitably Decline"

Within the financial sector, it is anticipated that the FSS will impose strong sanctions on banks similar to those applied to securities firms during their disciplinary reviews. Issuing weak sanctions only to banks could lead to controversy over fairness.

A senior bank official awaiting the disciplinary review explained, "The on-site investigation related to Lime funds at banks has already been completed, and we are expected to receive a disciplinary review opinion letter from the FSS soon. Once we receive the letter, we plan to convey the bank's position as much as possible, and after a two-week adjustment process, a disciplinary decision will be made." He added, "We did not expect additional sanctions related to Lime sales after already receiving severe penalties for the Derivative-Linked Fund (DLF) incident. The contents of the DLF and Lime cases are similar, but the atmosphere is moving toward additional sanctions rather than combined ones, which is hard to accept."

The banking sector feels unfair about the strong sanctions from financial authorities.

Under current law, sellers sell products based on the asset manager's investment plan, but there is a lack of systems to track whether the asset manager conducted proper investments as planned or if there were problems during the investment process, and to reflect such findings. Furthermore, the 2015 reform of private equity fund regulations, which lowered the minimum investment amount from 500 million KRW to 100 million KRW and changed the private equity fund pre-approval system to a post-reporting system, is argued to have caused excessive fee competition, inevitably leading to incomplete sales.

Another bank official lamented, "While incomplete sales due to fee competition can be punished, it is unfair to hold banks responsible for the private equity fund incident simply because they sold the products."

Some voices argue that to prevent recurrence, financial companies should appoint public interest directors at this year's regular shareholders' meetings to monitor management's arbitrariness and greed and enhance the public nature of finance. This afternoon, in front of KB Financial Group's headquarters, the Financial Labor Union and Financial Justice Solidarity held a press conference demanding that financial companies responsible for private equity fund failures and financial consumer damages appoint public interest directors.

Meanwhile, the FSS will also hold a dispute mediation committee next month for banks that sold Lime funds. Based on the estimated loss amount of the Lime fund, the mediation decision will prioritize compensation to victims first, with additional recoveries settled afterward.

In principle, compensation can only be made after losses are confirmed through redemption or liquidation, but since confirming losses takes a long time, the FSS is promoting this approach through agreements with sellers. Woori Bank, which has the largest Lime fund sales and has agreed to compensate estimated losses and completed on-site investigations, is expected to be prioritized for the mediation committee. An FSS official said, "Considering the completion of on-site investigations before Lunar New Year and the subsequent legal review and practical work, the mediation committee is expected around the end of February."