Top regulator under pressure to ease punishment of bank leaders

From left are Woori Financial Group Chairman Son Tae-seung and Shinhan Bank CEO Jin Ok-dong. Courtesy of each firm

By Lee Min-hyung

The Financial Supervisory Service (FSS) is facing growing pressure to mitigate disciplinary punishment on leaders of Shinhan Bank and Woori Financial Group, as the regulator continues to face accusations of abusing its power.

The watchdog sent an advance notice in February threatening tough sanctions against the top management officials of the lenders, citing their failure to supervise the sales of soured fund products offered by Lime Asset Management.

The FSS warned that Woori Financial Group Chairman Son Tae-seung will be suspended from duty and Shinhan Bank CEO Jin Ok-dong will be reprimanded. All of those measures are classified as tough forms of sanctions. When the FSS makes its final decision on the sanctions, the bank heads will be banned from working at financial institutions here for at least three years after they end their present terms.

But after the regulator delivered the advance notice early last month, the FSS has faced an escalating backlash.

The banking industry has stepped up its opposition to the FSS' decision, as the regulator is widely viewed as attempting to shift the blame for the soured loan fiasco onto the lenders. The FSS took issue with the bank chiefs' failure to closely monitor what fund products they sell.

Commercial lenders here, however, claimed that the long-held custom of slapping tough sanctions on bank leaders should be discarded unless their wrongdoings can be clearly justified under the law.

“The FSS' attempt to slap tough sanctions on bank leaders remains legally controversial here, so it is not proper for the regulator to seek such suppressive punishment on the lenders,” a financial industry source said.

Korea Federation of Banks (KFB) Chairman Kim Gwang-soo also urged the watchdog not to take severe disciplinary action against banks' top management, as they are not fully responsible for the soured fund scandal.

“The logic used by the FSS appears to be inconsistent with the principle of clarity required by the Ministry of Government Legislation,” Kim told reporters in a recent press conference. “The financial industry cannot predict such punitive measures, which will escalate uncertainties and stifle management activities at major financial groups here.”

He demanded the watchdog maintain consistency when slapping sanctions on financial firms, so they can predict and minimize any damage their businesses could suffer from a possible management reshuffle resulting from punitive measures.

The FSS is holding Jin and Son responsible for poor supervision of the banks' sales of troubled funds linked to Lime Asset Management. Woori sold 357.7 billion won ($318 million) worth of Lime funds, while those from Shinhan reached 276.9 billion won.

Late last month, the FSS held its first sanctions committee meeting which was attended by Son. The FSS held the second meeting on Thursday focusing on Shinhan's case.

Aside from the Shinhan Bank leader, Shinhan Financial Group Chairman Cho Yong-byoung also received a warning from the FSS for his poor supervision of the funds sold by Shinhan Bank and Shinhan Investment. But the warning was a minor punishment and will not cost him the chairmanship.

Officials from the two lenders said they have not confirmed what moves they intend to take following the punitive measures.

But the two companies are widely expected to file lawsuits if the FSS decides on tough sanctions.

This is the second time that Son has been slapped with sanctions from the regulator regarding the soured fund scandal. In January 2020, he was reprimanded for his mishandling of troubled derivatives-linked fund products. But he filed an administrative litigation against the regulator and succeeded in extending his third term in March last year.

“The FSS will be under growing pressure to stop abusing its power against financial firms, since the punishment, which is widely considered as being unilateral, will keep dampening morale at major banks,” an official from a major lender said.

“The role of the FSS is crucial in light of the growing importance of customer protection in the aftermath of a series of banks' involvements in the soured fund scandal,” the source said. “But any punishment should be made under a clear legal basis.”

According to data from the Korea Financial Investment Association, the nation's top five lenders are scaling down their sales of private equity fund products rapidly. The balance of their sales of the funds reached 12.92 trillion won as of the end of January, down 32 percent from a year earlier.