Financial Supervisory Service After Yoon Seokheon’s Departure, Alert to Impact on Bank Sector Disciplinary Committee and Subcommittee (Comprehensive)

Hardline Sanctions and Supervision Intensity May Shift
KIKO, Private Equity Fund Sanctions, and Comprehensive Inspections Likely to Drift
FSS: "Unrelated to Former Director Yoon... Will Handle According to Principles and Rules"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Jin-ho] "There are voices both within the financial sector and the authorities that the Financial Supervisory Service (FSS) chief wielded his authority too harshly during his tenure. It is expected that the firm stance will ease somewhat until a new head takes office. (Financial authority official A)"

There is a forecast that the rigid, one-sided approach to financial company sanctions and supervisory intensity maintained by the FSS over the past three years will undergo a shift. With former FSS chief Yoon Seok-heon having left, it is analyzed that a change in the FSS's tough stance has become inevitable.

According to the financial sector on the 13th, major commercial banks and financial holding companies are on high alert for any changes in the FSS's stance that may be detected in upcoming Dispute Mediation Committee (분조위) and Sanctions Review Committee (제재심) meetings. Since former chief Yoon left and the acting senior deputy chief Kim Geun-ik, who comes from the Financial Services Commission (FSC), has taken over, there are voices suggesting that the sharp edge aimed at the financial sector, such as CEO disciplinary actions, may not be maintained.

In particular, the first area to be affected by former chief Yoon's departure is the foreign exchange derivative product KIKO (Knock-In Knock-Out) compensation issue in the banking sector. The KIKO case involves export companies subscribing to avoid exchange rate fluctuation risks in 2008, resulting in massive damages amounting to about 3 trillion won. Although the Supreme Court ruled no fraud in KIKO, former chief Yoon strongly pushed the issue after taking office, eventually bringing it to the Dispute Mediation Committee.

In 2019, the FSS Dispute Mediation Committee recommended six banks?Woori, Shinhan, Hana, KDB Industrial, Citi, and Daegu Bank?to compensate four companies with 25.5 billion won, citing incomplete sales. However, only Woori Bank accepted the recommendation, while the others proceeded with voluntary adjustments.

However, with former chief Yoon stepping down, it is evaluated that the KIKO issue has effectively lost its driving force. Banks, which had difficulty making decisions due to concerns about breach of trust, no longer need to be cautious of the FSS. A banking sector official predicted, "There is a possibility that discussions may no longer proceed following former chief Yoon's departure." Another official said, "Even banks that made compensation decisions did so more out of moral responsibility than legal liability. Since former chief Yoon, who strongly pressured banks, is no longer present, it seems no one will step forward."

Will the Sanctions Review Committee’s Severity on Private Equity Funds Ease?... Uncertainty Surrounds Continuation of Comprehensive Inspections

The sanctions review related to banks' sales of private equity funds such as Lime is also a point of interest. Hana, Busan, Industrial, Gyeongnam, and Nonghyup Banks are preparing for sanctions reviews. Hana Bank is currently the first to face a sanctions review. Similar to the cases of Woori and Shinhan Banks, light disciplinary actions are expected, and with former chief Yoon, who led the private equity fund crisis, absent, there are forecasts that the disciplinary severity may be reduced.

The FSS had initially announced a sanctions review for Hana Bank within the second quarter. However, it has been confirmed that the FSS has not yet notified Hana Bank of the sanctions review schedule. Since the FSS is operating under an acting leadership, there is speculation that the schedule could be indefinitely delayed until a new chief is appointed.

A financial authority official said, "Since former chief Yoon, who enforced consecutive heavy sanctions on bank and holding company CEOs, has left, the intensity could be lower than previous cases."

Attention is also focused on whether the comprehensive inspections revived by former chief Yoon will continue. The FSS currently does not plan to abolish them immediately, but depending on the tendencies of the successor, the scope of inspections and sanctions could be significantly reduced. Banks mentioned as targets for this year's comprehensive inspections include Woori Financial Group, Woori Bank, KB Financial Group, KB Kookmin Bank, Kakao Bank, and Korea Citi Bank.

However, the FSS maintains that regardless of former chief Yoon's absence, it will carry out sanctions reviews and dispute mediation committees based on principles and fundamentals. An FSS official said, "Although some voices anticipate a shift in stance, we hope there will be no premature assumptions. Most investigations related to sanctions reviews and dispute mediation committees have already been completed, and for fairness, we will adhere to principles and fundamentals."