Will Shinhan Investment Corp. Expand Disciplinary Targets for ETF Trading Violations?

Risk Headquarters and Audit on Alert for Disciplinary Actions

There are growing expectations that the scale of severe disciplinary actions against Shinhan Investment Corp., which incurred losses related to exchange-traded funds (ETFs), may be expanded. It is widely assessed that the Risk Management Group, which can impose horizontal sanctions when internal control issues arise within the Wholesale Group, inevitably bears responsibility. The Financial Supervisory Service (FSS) previously pointed out vertical and horizontal internal control problems regarding Shinhan Investment Corp.'s ETF losses.

According to the financial investment industry on the 14th, the FSS's Financial Investment Inspection Division 2 has decided to extend the on-site inspection of Shinhan Investment Corp. by one week. The on-site inspection is known to be comprehensively examining ETF LP operation guidelines, risk management, internal control design, and operation.

Shinhan Investment Corp. Organization Chart. Homepage capture

The main issue is the scope of responsibility for internal control. Inside and outside the financial authorities, there is a high possibility of severe disciplinary actions against the International Business Division where the incident occurred and the Wholesale Group to which the division belongs. There is also an opinion that the responsibility of the Risk Management Division cannot be overlooked from the perspective of horizontal internal control.

An industry insider familiar with inspection work said, "Within the supervisory authorities, it is naturally said that the line (personnel) of the division where the incident occurred is subject to severe disciplinary action, and that the Risk Management Division and audit personnel also bear responsibility," adding, "Risk structures should be managed at the individual, team, and division levels and on daily, weekly, and monthly bases, but internal control was much more lax than expected."

The FSS plans to decide the level of disciplinary action within the year. Two days after the incident was reported, Kim Byung-hwan, Chairman of the Financial Services Commission, said at an executive meeting, "There are ongoing concerns as various embezzlements and fraudulent loans continue in the financial sector, and recently, a large-scale loss occurred at Shinhan Investment Corp.," adding, "I hope the Financial Supervisory Service thoroughly inspects and investigates this incident and takes necessary measures based on the results."

Both the Financial Services Commission and the FSS are taking this matter seriously. Shinhan Financial Group is also treating it with gravity. After the FSS inspection is completed, Shinhan Financial Group plans to conduct a separate audit of Shinhan Investment Corp. at the holding company level.

In January this year, the FSS imposed severe disciplinary actions including 'institutional warnings' and fines on Shinhan Investment Corp. and others for violating internal control standards under the Corporate Governance Act in relation to the Lime and Optimus scandals. The ETF loss incident differs in nature from the Lime and Optimus cases. However, since internal control issues have surfaced again, there are expectations that the Risk Management Division will also be included among those subject to disciplinary actions.

However, it is expected to take more time until the final sanctions are imposed. When the FSS inspection division decides on disciplinary recommendations for securities firms, the Disciplinary Committee, directly under the FSS Governor, determines the level of discipline. If the sanction is severe or higher, the disciplinary agenda is submitted to the Securities and Futures Commission under the Financial Services Commission to finalize the sanctions.