Ahead of the National Assembly’s October state audit, attention is focusing on major issues at financial authorities and the financial sector. The audit is expected to cover household loan volume controls, efforts to improve financial firms’ governance structures and internal controls following a string of financial incidents. Large-scale incidents at policy banks and the progress of reforms at the National Agricultural Cooperative Federation are also expected to be on the review list.

The annual audit will run from Oct. 6 to 27, the National Assembly and the financial industry said. The National Assembly’s Political Affairs Committee plans to examine the effectiveness of financial policy and the supervisory and management framework for financial companies, targeting the Financial Services Commission, the Financial Supervisory Service and policy banks. The National Agricultural Cooperative Federation will be covered in the audit by the Agriculture, Food, Rural Affairs, Oceans and Fisheries Committee.

The audit is expected to review both financial authorities’ responses to major issues and the management responsibility of financial firms’ executives. As requests continue to summon financial holding company chairmen and bank chiefs as witnesses, attention is also on whether they will actually appear at the hearings.

HOUSEHOLD LOANS, ELS, ETF... REVIEW OF REGULATORY POLICY AND OVERSIGHT

A key issue for the Financial Services Commission is its household loan volume control policy. In April, it set this year’s target for managing household loan growth at 1.5 percent. On Aug. 13, as it announced a comprehensive financial package aimed at stabilising the real estate market, it expanded the target to around 3 percent. It described the move as a step to secure lending capacity needed to promote housing supply and support young people and end-users.

The audit is expected to examine the background to the revised household loan target, policy consistency and measures to protect end-users. The impact of banks’ lending restrictions under volume regulations on funding access for ordinary people and end-users is also a key issue.

Although financial authorities expanded the household loan growth target, additional lending capacity at major banks is reported to have been effectively exhausted in less than a month. The audit is expected to address why that capacity was depleted so quickly and what measures will be taken to supply funds to end-users.

There is also controversy over the introduction of single-stock leveraged exchange-traded funds (ETFs). The commission laid the groundwork in April for launching such ETFs. After products were launched, it announced supplementary measures, including tougher minimum deposit requirements, to protect investors. The audit is expected to examine whether investment risk and market volatility were sufficiently reviewed during the introduction process and whether investor protection safeguards were appropriate.

At the Financial Supervisory Service, key issues include sanctions over mis-selling Hong Kong H-index equity-linked securities (ELS) and the effectiveness of oversight of financial companies’ internal controls. In June, the watchdog approved a sanction plan cutting combined fines for 5 banks that sold Hong Kong ELS to around 600 billion won. With the amount sharply reduced from the initially calculated roughly 4 trillion won, questions could be raised about the reduction process, sanction standards and the effectiveness of consumer protection. Final fines are confirmed after approval by the Financial Services Commission.

Fee issues in banks’ sales of ETF trust products are also under review by the watchdog. The watchdog said on Sept. 17 that it was examining short-term trading in banks’ ETF trust businesses and sales structures centred on upfront fees. Key issues include whether financial companies deliberately encouraged upfront-fee products to boost profit and whether they sufficiently explained fee structures to consumers.

FINANCIAL HOLDING GROUPS, BANKS FACE GOVERNANCE AND INTERNAL CONTROL ISSUES

Governance improvements and executives’ responsibility for internal controls are key issues for the 4 major financial holding groups. Plans promoted by financial authorities to improve financial firms’ governance structures have been delayed as debate continues over measures such as limiting chairmen’s reappointments. The audit is expected to review the transparency of chairman appointment and reappointment procedures, the board’s check-and-balance function and progress in pushing ahead with governance improvements.

Repeated financial incidents at banks are also a major issue. Financial incidents at the 4 major banks increased to 34 in 2024 from 15 in 2023, and to 80 in 2025, the financial sector said. This year, 30 financial incidents occurred through July, involving 23.686 billion won.

The audit is also expected to examine how the responsibility structure introduced at financial firms has affected efforts to prevent incidents and strengthen management oversight. Key points could include whether internal controls operated properly before incidents occurred and whether reporting and follow-up steps were carried out quickly after incidents were identified.

Banks are also expected to face questions about protecting end-users as lending supply is constrained under household loan controls. Although authorities expanded the overall management target, perceived access to loans can differ depending on each bank’s lending capacity and funding supply conditions. The audit is expected to examine bank-by-bank lending management and financial consumer protection measures.

POLICY BANK INCIDENTS AND AGRICULTURAL COOPERATIVE REFORMS ALSO UNDER REVIEW

Among policy banks, large-scale incidents at home and abroad involving IBK Industrial Bank of Korea are being cited as a key issue. This year, its China unit had a financial incident worth 83.3 billion won linked to a local online lending platform, and a 18.2 billion won real estate loan fraud was uncovered in South Korea.

In the domestic real estate loan fraud case, additional loans are reported to have been extended even after the incident was reported to the watchdog. How the bank failed to grasp the incident early despite a police search and seizure warrant, and its post-incident response system, could become key lines of questioning. This could lead to questions for IBK President Min-young Jang (장민영) about incident identification and reporting systems and whether loan screening and post-management were appropriate.

Korea Development Bank and the Export-Import Bank of Korea are expected to be reviewed on their policy financing supply performance and whether funding support has been appropriate. Issues for review include whether policy funds supplied by policy banks, including IBK, to small and midsize businesses and exporters were used in line with their original purpose and whether financing is being provided in a timely manner to companies that need support.

The National Agricultural Cooperative Federation is expected to be reviewed by the agriculture committee on the progress of reforms, including governance improvements and stronger internal controls. The agriculture ministry said on March 9, as it announced the results of a joint government special inspection, that it had identified problems including preferential loans and contracts and lax budget execution in the federation, its subsidiaries and member cooperatives. The government said it referred 14 cases with a high likelihood of illegality for investigation and decided to pursue improvements in the election system, governance structure and internal controls.

On Sept. 11, an enforcement decree of the Agricultural Cooperatives Act took effect, including measures to set internal control standards for cooperatives, appoint compliance officers and shorten the cycle for external audits. The audit could examine implementation of improvement measures after the special inspection, stronger internal controls at member cooperatives and the federation’s management and supervisory system.

ATTENTION ON WHETHER FINANCIAL HOLDING CHAIRMEN AND BANK CHIEFS WILL BE CALLED AS WITNESSES

Whether financial holding chairmen and bank chiefs will be selected as witnesses is also in focus in connection with major issues in the financial sector.

Park Hong-bae (박홍배), a lawmaker from the Democratic Party, is reported to have requested 5 financial holding group chairmen and 5 bank chiefs to appear as audit witnesses, political circles said. The aim is to examine the need for improved governance structures at financial firms and the sector’s social role in areas such as household loans and inclusive finance.

The People Power Party is reviewing requests for witnesses focused on financial issues such as single-stock leveraged ETFs and household loan volume controls.

Witness request targets include Yong-beom Kim (김용범), a former presidential policy chief, and Hyun-joo Park (박현주), chairman of Mirae Asset Group. Political circles also said they are reviewing whether to request the 4 major commercial bank chiefs as witnesses.

The final witness list will be decided through consultations between the ruling and opposition parties’ floor members on the Political Affairs Committee. Attention is on whether financial holding chairmen and bank chiefs will actually appear at the hearings and respond to questions on key issues such as household loans, internal controls and governance structures.