[Exclusive] Comprehensive Management of PF Insolvency... Financial Supervisory Service Begins Inspection of 'PF Personnel' in Financial Sector

Completed Comprehensive Survey of Experienced Hires Over 5 Years
Inspections Focused on Financial Firms with Potential Irregularities
Detected Suspicions of Executive Bypass Hiring

As the government's restructuring procedures for the soft landing of real estate project financing (PF) are gaining momentum, financial authorities have begun to scrutinize the workforce management practices of financial companies to identify structural causes behind PF defaults. This move is interpreted as a precise diagnosis of the vicious cycle where reckless lending leads to large-scale defaults depending on the financial market situation, aiming to prevent recurrence.

According to financial circles and authorities on the 4th, the Financial Supervisory Service (FSS) recently completed a full inspection of the hiring status of experienced professionals in PF-focused alternative investments over the past five years at securities firms and asset management companies, and began inspections from the 30th of last month. It is known that for some financial companies where anomalies were found during the full inspection, responsible executives are being interviewed remotely.

In particular, under the Financial Company Governance Act, individuals with disciplinary records cannot be hired as executives for a certain period, but it has been reported that some financial companies circumvented this rule in their hiring practices. A senior FSS official said, "Based on the full inspection results, we have started document inspections this week focusing on companies with potential violations related to hiring and those from which we have independently collected information."

An FSS official stated, "Specifically, we are identifying cases where employees disciplined at certain companies in the PF and alternative investment sectors moved to work at other companies," adding, "We are currently reviewing which financial companies have many employees with disciplinary records."

The FSS’s full inspection and investigation are analyzed to be due to repeated defaults occurring in real estate PF, which constitutes a large portion of alternative investments, adversely affecting the soundness of the secondary financial sector. Recently, the FSS has been intensifying PF risk management by shortening the inspection cycle of real estate PF auction and foreclosure performance from monthly to weekly.

In fact, concerns about credit rating downgrades due to real estate PF defaults are growing among savings banks and securities firms. According to data submitted by the FSS to the office of Kim Jae-seop of the People Power Party, as of the end of March this year, the ratio of non-performing loans (classified as substandard or below) in securities firms’ real estate PF exceeded 36%. This is nearly double the level compared to the end of March last year, with the outstanding balance reaching 3.2 trillion won.

Earlier in June, the FSS also conducted a full inspection of the hiring status and job responsibilities of experienced personnel with disciplinary records at securities firms and asset management companies. Furthermore, the decision to separately review experienced personnel in the alternative investment sector appears to be part of a comprehensive measure to more precisely analyze the causes of the PF default crisis shaking the entire financial sector recently and to strengthen post-management. Regarding the purpose of this inspection, the FSS stated that it is primarily for understanding the current situation and collecting basic data to prevent recurrence rather than direct sanctions, but it does not rule out the possibility of additional supervision of specific companies or departments depending on the results.

Within the financial sector, the background for the intensification of this inspection was pointed out as the Hanyang Securities case. This refers to the case where personnel previously reported to the prosecution for self-interest pursuit related to PF at Hi Investment & Securities last year were confirmed by authorities to have moved to Hanyang Securities. An FSS official explained, "This is not aimed at any specific company or case, but such cases have increased the necessity for a comprehensive inspection."

The financial sector views this investigation as a strong indication of the financial authorities’ intent to rigorously manage PF defaults and is closely monitoring the FSS’s actions. This investigation could lead not only to strengthened supervision of alternative investments including PF but also to demands for enhanced internal controls related to workforce hiring and management systems.

A financial industry insider said, "The PF default issue is expanding beyond a mere financial product problem to the level of workforce management," and predicted, "As PF risk management emerges as the top priority for financial companies, more thorough verification in workforce management will be conducted."