South Korea watchdog to add consumer-protection teams to bank inspections

South Korea’s Financial Supervisory Service, which has said it will create separate consumer-protection teams during regular examinations, is set to inspect KB Kookmin Bank, Jeonbuk Bank and K Bank this year. Banks are watching closely for changes, including a revamp of the consumer-protection assessment system.

According to the financial industry on Saturday, the FSS will begin regular bank inspections in the first half of this year, starting with Jeonbuk Bank. Regular examinations of KB Kookmin Bank and K Bank are also expected to begin within the year, the industry said.

The FSS is expected to focus this year’s regular inspections on how well financial firms protect consumers. FSS Gov. Lee Chan-jin told bank CEOs at a meeting on Feb. 12 that the watchdog would shift to a preventive consumer-protection system and form a separate consumer-protection inspection team during regular examinations. He said the FSS would “closely review every step — product design, screening and sales — from the perspective of consumer protection.”

Industry officials said a dedicated consumer-protection team could lead to tougher checks of banks’ consumer-protection systems. Expectations of stricter oversight have also grown after the FSS created a consumer-protection unit that reports directly to the governor as part of an organizational overhaul.

Scrutiny is also expected to extend to sales procedures and the adequacy of internal controls, as sales of high-risk, complex investment products — which shrank after the Hong Kong H-index equity-linked securities (ELS) controversy — could rise again. Banks remain cautious about selling such products, but sales could increase once the ELS issue is considered settled. Early last year, financial authorities announced consumer-protection measures that included sales through designated hub branches, strengthening suitability and appropriateness assessments, and improving reports on inappropriate determinations.

With the FSS also signaling changes to its consumer-protection assessment framework, banks facing regular inspections are expected to step up internal reviews of whether their consumer-protection systems are working properly under relevant laws, including the Financial Consumer Protection Act and the Personal Debtor Protection Act.

Beyond consumer protection, corporate governance is expected to be another major theme in this year’s inspections, as financial authorities have pledged to prepare a plan to advance governance at financial companies by next month. If regular inspections take place after that plan is announced, the FSS could intensively check whether the measures are being implemented in practice.

Attention is also focused on whether KB Financial Group Chairman Yang Jong-hee, whose term ends in November, will seek another term. If a regular inspection of KB Kookmin Bank takes place while KB Financial’s management succession process is underway, the holding company is likely to be affected directly or indirectly. KB Financial plans to begin its succession process no later than the end of August.