[Inside Chodong] Concerns and Expectations for the Accountability Structure

Changhwan Lee, Deputy Head of the Economic and Financial Department

"Since the introduction of the Accountability Structure, there have been more things to pay attention to, and the burden of financial accident occurrences has increased."

After the Accountability Structure was fully implemented in the financial sector, financial company officials interviewed to gauge the on-site atmosphere unanimously expressed difficulties. Previously, efforts were focused on managing incidents after they occurred, but since the introduction of the Accountability Structure, more effort must be put into preventing accidents. They collectively stated, "We are doing our best to prevent financial accidents, but it is not easy to adapt to a situation where we have to prevent things that have not even happened yet."

The financial authorities that introduced the system have repeatedly emphasized that prevention comes before punishment. A Financial Services Commission official said, "The introduction of the Accountability Structure is aimed at preventing financial accidents, not punishing executives," adding, "If executives work with greater vigilance than before, it could mean the system is functioning well."

However, there are concerns that inputting company personnel and funds to prevent incidents that have not yet occurred might reduce work efficiency. There is also the possibility that management may become passive due to the burden of disciplinary actions. In the past, it was rare for top executives such as bank presidents or CEOs to be punished for financial accidents occurring at lower levels, but in the future, high-ranking executives may be held responsible and step down. There is worry that managers might operate the company more cautiously to avoid disciplinary measures, which could negatively impact company performance.

There are also concerns that despite significant resource input, financial accident prevention might not be effective. In fact, statistics show that since the enactment of the Serious Accident Punishment Act, which is similar to the Accountability Structure, in 2022, the number of people punished has increased, but accidents at construction sites have not significantly decreased. There is no guarantee that the Accountability Structure will not become a second Serious Accident Punishment Act.

Despite these on-site concerns, the introduction of the Accountability Structure is partly a result of our financial companies themselves. The government continuously demanded internal controls, but financial accidents have not ceased annually. Incidents such as the 2019 Derivative Linked Fund (DLF) scandal, the 2023 Hong Kong H-Share Index (Hang Seng China Enterprises Index·HSCEI) Equity-Linked Securities (ELS) scandal, and improper loan cases at Woori Bank and IBK Industrial Bank have resulted in hundreds of billions to trillions of won in financial accidents every year. The social impact of these incidents was too great for financial companies to expect self-purification. Last year, the damage amount from financial accidents at major domestic banks was 187.7 billion won, a 2.8-fold increase compared to 66.6 billion won recorded the previous year.

Advanced foreign countries such as the UK, Australia, and Singapore, which introduced systems similar to the Accountability Structure earlier than us, also adopted them as a desperate measure to prevent continuous financial accidents after the global financial crisis. While there has been some accident prevention effect since the system's introduction, there are local criticisms that excessive regulation has hindered the development of the financial industry.

Ultimately, the success and development direction of the Accountability Structure depend on how much financial accidents decrease in Korea this year and next year. If financial accidents decline in the future, despite the burden on the field, the Accountability Structure will become a system that must be better observed. If the accident prevention effect is minimal, calls for improvements are expected to grow.