Financial Supervisory Service Unable to Conclude IBK Disciplinary Hearing Over Private Equity Fund Scandal... Banking Sector 'Tense' (Comprehensive)

Financial Supervisory Service "Disciplinary Hearing Resumes on the 5th of Next Month"

[Asia Economy Reporter Park Sun-mi] On the 28th, the Financial Supervisory Service (FSS) failed to finalize severe disciplinary action against former IBK Bank President Kim Do-jin, who caused massive losses to investors through the sale of Lime Fund and Discovery Fund.

The FSS held a disciplinary review committee meeting on the same day and presented and deliberated on the inspection results and proposed measures regarding Discovery Asset Management and IBK Bank, but no conclusion was reached. The FSS stated, "The disciplinary review committee conducted the deliberation after thoroughly listening to statements and explanations from multiple company representatives (including legal counsel) and the Inspection Bureau," adding, "As a result, it was decided to resume the meeting on the 5th of next month."

Accordingly, the decision on the level of disciplinary action against former President Kim, who was reportedly pre-notified of severe disciplinary measures by the FSS due to the private equity fund scandal, will be postponed until the 5th of next month.

IBK Bank sold Discovery US Fintech Global Bond Fund and Discovery US Real Estate Senior Bond Fund worth 361.2 billion KRW and 318 billion KRW respectively between 2017 and 2019. However, the U.S. asset manager failed to recover the bonds invested with the fund's money, resulting in redemption delays of 69.5 billion KRW and 21.9 billion KRW respectively. The Lime Fund, which caused a large-scale redemption suspension, was also sold for 29.4 billion KRW.

The FSS began full-scale disciplinary review committee meetings for a total of eight banks that sold the problematic private equity funds, starting with IBK Bank. Including IBK Bank, eight banks sold the Lime Fund. The sales volume of Lime Fund by bank is highest at Woori Bank with 357.7 billion KRW, followed by Shinhan Bank with 276.9 billion KRW, Hana Bank with 87.1 billion KRW, Busan Bank with 52.7 billion KRW, Gyeongnam Bank with 27.6 billion KRW, Nonghyup Bank with 8.9 billion KRW, and Korea Development Bank with 3.7 billion KRW.

The banking sector is on edge regarding the disciplinary level for former IBK Bank President Kim. There is growing concern that if a precedent for severe disciplinary action is set for the first time in the banking sector, severe disciplinary outcomes will inevitably follow in disciplinary reviews for other banks such as Woori, Hana, and Shinhan.

In the disciplinary reviews scheduled within the first quarter, Son Tae-seung, Chairman of Woori Financial Group, Ham Young-joo, Vice Chairman of Hana Financial Group, and Ji Sung-kyu, President of Hana Bank, who held the CEO position during the concentrated sales period of Lime Fund from 2018 to 2019, are within the scope of severe disciplinary action. In particular, Chairman Son and Vice Chairman Ham already received severe disciplinary warnings last year related to the overseas interest rate-linked derivative-linked fund (DLF) scandal, so if disciplinary action related to the Lime Fund is added this time, they will face significant burdens.

Tension over Severe Disciplinary Measures in the Banking Sector

Within the banking sector, while the financial authorities are also responsible for the private equity fund scandal due to inadequate system management, there is some resentment that severe disciplinary punishment is being concentrated on financial companies that sold private equity funds. Accordingly, if severe disciplinary actions are confirmed for IBK Bank and other banks, there is a possibility that administrative lawsuits and injunction applications to suspend the effectiveness of the disciplinary measures will follow in protest.

A senior bank official awaiting the disciplinary review said, "We did not expect additional disciplinary action for Lime Fund sales after already receiving severe disciplinary action related to the DLF scandal," adding, "The contents of the DLF and Lime Fund scandals are similar, but the atmosphere is moving toward additional disciplinary action rather than combined disciplinary action, which is hard to accept." Another bank official lamented, "While it is possible to punish incomplete sales due to commission competition, it is unfair to hold banks fully responsible for the private equity fund scandal just because they sold the products." Voices from the industry also suggested, "There could be a series of lawsuits challenging the severe disciplinary actions."

Under current law, sales companies sell products based on the asset manager's investment plan, but there are still criticisms that there is a lack of systems to track whether the asset manager made proper investments as planned and whether there were problems during the investment process, and to reflect this. It is argued that disciplinary action alone without system improvement has limitations in preventing recurrence. Some say, "The 2015 private equity fund system reform, which lowered the minimum investment amount from 500 million KRW to 100 million KRW and changed the private equity fund pre-screening system to a post-reporting system, also caused excessive commission competition, making incomplete sales inevitable," adding, "System improvement should come before severe disciplinary action against bank CEOs."