In Korea, investors and selling financial companies are in a difficult situation due to the postponement of redemptions of private equity funds from the second half of 2019. Accordingly, in order to hold the CEOs of financial companies liable for halting fund redemptions, the Financial Supervisory Service (FSS) has begun taking disciplinary action against such CEOs on for breaches of fiduciary duties in failing to establish internal control standards. Although under the current laws and regulations, sanctions cannot be imposed for violating the obligation to comply with internal control standards, the FSS took action to hold the relevant CEOs accountable for not having performed such duties. Thus far, CEOs of a number of financial companies have been subject to such disciplinary measures.

Among the financial companies, Yoon & Yang LLC represented the management of Bank “A” and lodged an administrative suit against the head of the FSS seeking revocation of the disciplinary measures on the grounds of the same being unlawful. There have been very few cases where the current management of a financial company filed an administrative suit against the head of the FSS. This is attributable to the fact that the financial companies are afraid of the FSS, which has the authority to inspect financial companies at all times. However, the latest disciplinary action by the FSS on the grounds of the breach of the duty to establish internal control standards was considered too unreasonable in the financial sector. The overriding sentiment within the financial circle is that the FSS needed a scapegoat to finger-point the blame for the fallout from the decision to halt fund redemptions and, as such, cited the breach of the duty to establish internal control standards to take disciplinary action against the CEOs.

Recently, a Korean court revoked FSS's disciplinary measures regarding internal control issues for the first time, and ruled that the head of the FSS’s disciplinary measures against Bank “A” were unlawful. The gist of the court’s judgment is as follows:

(i) The content of the obligation to establish internal control standards as set forth in the Act on Corporate Governance of Financial Companies refers to the duty to establish such standards with respect to “legal matters and relevant key matters” and does not impose the same level of duty on the failure to establish such standards with respect to “specific and practical matters.”
(ii) In the process of operating internal control standards, the absence of certain “specific and practical matters” is deemed to be insufficient performance of duty to establish internal control standards as opposed to the nonperformance of such duties altogether.
(iii) Various unfair acts, illegal acts, and breaches of fiduciary duties, which are diverse in nature, cannot be demanded to be predicted in advance and included in detail.

The foregoing judgment is tenable in light of the principles of the rule of administrative law. The reason being that the disciplinary measures by the FSS pertains to establishing ex post facto liability based on the subsequent outcome rather than based on the act of breaching the duty of establishing internal control standards per se.

The court’s ruling is expected to have a significant impact on the Korean financial industry as well as financial watchdogs. Going forward, the financial sector will be expected to establish internal controls at a higher level and, in respect of disciplinary measures, this will present an opportunity to break away from existing practices and become more faithful to the principles of the rule of administrative law.

Author 1: Soonghee Lee

Partner
+82-2-6003-7507
shlee@yoonyang.com
www.yoonyang.com

Soonghee Lee is a senior partner at Yoon & Yang LLC, and his main practice areas are corporate governance, and finance and securities related work. Mr. Lee is highly experienced in advising on financial regulations, anti-money laundering, capital market litigation and dispute resolution, and complex transactions involving financial institutions, financial investment companies and listed companies in Korea. His expertise includes advising on financial investment instruments, including structured securities, such as foreign exchange derivatives, ELS and other financial derivatives, ISDA contracts, and investigation/inspections from financial supervisory institutions.

He was recognised by asialaw in 2016, 2017 and 2018 as a leading lawyer in capital markets and financial services regulatory and was also selected by asialaw in 2020, 2021 and 2022 as a distinguished practitioner in banking & finance and capital markets. He has been consistently named as a leading lawyer in Capital Markets by IFLR1000 from 2014 to 2022 as well as a highly regarded lawyer in Banking/Finance by IFLR1000 from 2017 to 2022.

Author 2: Jeongsu Park

Partner
+82-2-6003-7798
jspark@yoonyang.com
www.yoonyang.com

Jeongsu Park is a partner at Yoon & Yang LLC. His main practice areas include tax and customs and administrative litigation. He earned his LL.B. at Seoul National University College of Law and LL.M. at Seoul National University Graduate School of Law. Jeongsu Park began his career in 2001 as a judge at the Daejeon District Course.

Afterwards, he served as a judge at the Incheon District Court, Seoul Northern District Court, Seoul Administrative Court and Seoul High Court. He also served as a presiding judge and researching judge at the Changwon District Court and presiding judge at the Busan District Court and Uijeongbu District Court. He retired as a presiding judge of the Seoul Southern District Court. He joined Yoon & Yang’s Corporate Litigation Practice Group in 2018 as a partner.