Banking groups on alert over hawkish regulators

Heads of two regulators set to handle aftermath of fund fiasco

By Lee Min-hyung

Korea's banking groups are on growing alert over the newly appointed chiefs of local financial regulators, who have been sending repeated signals of adopting principle-based regulations.

A group of banks and financial firms are still grappling with the aftermath of their mis-selling of some risky fund products, but they have been able to evade sanctions due to the absence of a leader at the Financial Supervisory Service (FSS), after its former governor, Yoon Suk-heun, left office in May.

The months-long leadership vacuum, however, ended last week when Jeong Eun-bo was appointed as the final figure to lead the watchdog until the end of the current Moon Jae-In administration.

Jeong underlined his strong willingness to fulfill the FSS's supervisory role with a focus on following the rule of law and principles.

“We are going to focus on financial supervision based on law and principles,” he said in a recent address following his appointment. “Every single administrative process should be executed according to laws and principles, in order for the authority to achieve its goals in areas such as customer protection, financial market stabilization and sound management of financial firms.”

The message comes as a kind of pressure for financial firms mired in a scandal surrounding the sale of the risky fund products of Lime Asset Management. These financial firms include KB Securities, Daishin Securities and Shinhan Investment.

The sanctions to be placed on the financial firms have not been finalized, even nine months after the FSS brought the case to its sanctions committee on November 2020. The Financial Services Commission (FSC) makes the final decision on the level of the sanctions.

The delay has been largely attributed to the leadership vacuum at the regulator, but chances are growing that the issue will be settled soon, once leadership at the two regulators is stabilized.

Koh Seung-beom, the nominee for FSC chairperson, is expected to take office as early as the end of August, after he passes a National Assembly confirmation hearing.

The former Bank of Korea monetary policy board member is widely considered to be a hawkish official supportive of monetary tightening.

He will team up with Jeong to put a timely end to the sanctions-related tasks related to the recent financial scandals regarding the Lime funds and some derivative-linked funds (DLFs).

Keen attention is now focused on the ruling of an administrative lawsuit that Woori Financial Group Chairman Son Tae-seung filed against the FSS over its decision to slap it with a reprimand, which is classified as a heavy level of sanctions. Woori and Son have urged the watchdog to withdraw its decision. If Son fails to win the lawsuit, he will not be able to extend his term, posing a serious management risk to the major financial holding firm.

The ruling will be delivered on Aug. 20, and it will determine the future direction of the regulators' planned sanctions on other financial firms.

In January 2020, Son took a similar legal step against the FSS after he was slapped with heavy sanctions, with the watchdog holding him responsible for the financial group's mis-selling of some DLFs. At that time, he won the lawsuit and was able to extend his term for another three years starting from March 2020.

The two financial watchdog leaders are also displaying a series of signs that they will keep tightening regulations on household loans in order to lessen the widening financial imbalance amid current super-low interest rates.

“We are going to thoroughly manage (surging) household debt,” he told reporters Friday. “I will also keep coming up with measures to increase the efficacy of our policies for curbing household debt.”

Bank industry officials said they have no choice but to increase interest rates for loan products at a time when authorities are tightening regulations on loans.

“Under the regulations, banks can provide reduced amounts of loans to customers, so they are likely to minimize their possible losses in the loan-deposit market by increasing interest rates for loan products,” a source in the banking industry said.