Criticism spanning governance, loan rate-setting, security and consumer protection was raised one after another at a comprehensive parliamentary audit of the financial sector. Controversy flared over a practice of rehiring retired executives at financial holding companies as advisers and over preferential treatment for former Financial Supervisory Service officials moving into financial-sector jobs. Also under scrutiny were add-on rate increases and cuts to preferential rates at some banks, and the effectiveness of compensation for voice phishing victims. Vulnerabilities in banks' security programs and a shortage of long-term fixed-rate mortgage supply were also key issues.

At the National Assembly Political Affairs Committee's comprehensive audit of the financial sector on Oct. 22, questioning continued over internal controls and management accountability at financial firms and the system for protecting financial consumers. Financial authorities said they would consider institutional improvements, including governance reform, stronger interest-rate disclosures and revisions to compensation standards for voice phishing.

Financial holding companies rehire 38 retired executives; revolving-door concerns at watchdog also raised

Lawmakers said a practice in which retired executives at financial holding companies remain in the group with titles such as adviser is a blind spot in governance management. The practice has been dubbed that of "shadow executives."

Data presented by Democratic Party lawmaker Kim Yong-man (김용만) showed that a review of 8 financial holding companies found that 6 rehired 38 retired executives. They took titles such as adviser, consultant and specially appointed researcher at affiliates or research institutes.

The criticism was that once they are no longer legally classified as executives, their pay and work details are not sufficiently disclosed. They can also escape oversight by boards and shareholders. Concerns were also raised that it could undermine the purpose of accountability maps introduced to clarify the scope of management responsibility.

Operating cases by holding company were also cited. Woori Financial was criticised for creating separate positions for retired executives. Issues were also raised at KB Financial and BNK Financial over advisory activities by retired executives, compensation payments and related decision-making procedures.

Financial authorities said they are in working-level talks on reflecting matters related to advisory and consulting arrangements for retired executives in a governance reform plan for financial holding companies now being prepared. They also mentioned the possibility that the final reform plan could include related content.

Lawmakers also flagged rehiring of retired Financial Supervisory Service officials at financial holding companies.

Data lawmakers received from financial authorities showed that of 152 former financial authorities officials hired by financial holding companies in the past 5 years, 78 were from the Financial Supervisory Service. Thirteen were from the Financial Services Commission.

Lawmaker Jeon Hyun-hee (전현희) said conflicts of interest and preferential treatment could arise when people who supervised financial firms take jobs after retirement at the firms they once oversaw. She said existing job-screening and contact-restriction rules are not enough to prevent it.

Financial Supervisory Service Governor Lee Chan-jin (이찬진) said internal rules include a one-year ban on entering the watchdog's premises after retirement and a three-year contact restriction, but their effectiveness has limits. He said he would strengthen internal regulations by referring to management systems at least at the level of the Fair Trade Commission.

Rate controversy extends to regional and internet-only banks; watchdog to review stronger disclosure

In the banking sector, adjustments to add-on rates and cuts to preferential rates resurfaced as issues. After earlier audits raised concerns over how the five biggest banks calculate lending rates, questioning expanded on the day to regional banks and internet-only banks.

Democratic Party lawmaker Min Byeong-deok (민병덕) said BNK Kyongnam Bank and Jeju Bank raised add-on rates while also cutting preferential rate benefits. He also cited K Bank as an example of raising add-on rates for some loan products.

Lawmakers raised an issue that banks can raise add-on rates by adjusting target rates of return. They said that although the Banking Act was revised to limit the reflection of statutory costs in add-on rates, banks can weaken the effect of reforms intended to lower borrowers' actual interest burdens if they adjust other components of rates.

Some also called for a joint special inspection by the Financial Services Commission and the Financial Supervisory Service.

Financial authorities said they would further examine the status of interest-rate calculations in the banking sector. Lee said the watchdog would use consumer impact assessments and inclusive finance assessments and would consider stronger disclosures about the process of determining lending rates.

The aim is to let financial consumers check information on rate decisions, encourage competition among banks and strengthen consumers' choices.

Low voice phishing compensation; vulnerabilities in bank security programs flagged

On financial consumer protection, the effectiveness of the voluntary compensation system for voice phishing became an issue.

Jeon said voice phishing losses last year totalled 281.1 billion won, but actual compensation through the voluntary scheme was about 1.08 billion won.

She said that even when banks acknowledge compensation liability, compensation ratios remain at about 10 to 20 percent. With some precedents recognising about 40 percent liability, calls were made to supplement current voluntary compensation standards.

Lawmakers also said banks need to recognise responsibility more broadly even when victims were deceived into transferring money themselves or providing personal information such as identification cards.

Lee said he agreed that compensation under the current voluntary system is low and said there is a need in the long term to institutionalise strict liability compensation. He also said the watchdog would guide financial firms to apply compensation standards reflected in relevant precedents even before any institutionalisation.

Concerns over the financial security system in the banking sector also continued.

Lawmaker Son Myung-soo (손명수) said that of 19 domestic banks, 9 require customers to install separate security programs during online financial transactions. He said such programs themselves could be misused as a route for hacking attacks.

Data Son presented showed a total of 19 vulnerabilities were found in 7 types of domestic installable security programs. He said 22 security vulnerabilities were also confirmed in 7 servers related to a specific security program.

He said programs installed to protect users could instead create new security risks and that the existing financial security system centered on installable programs should be re-examined.

Lee said the watchdog is reviewing the need to improve the financial security system and would consult with the Financial Services Commission and related agencies in connection with national-level artificial intelligence security policy.

New pure fixed-rate mortgage share at 10 percent; concern over rate fluctuation risk

Improving the interest-rate structure of mortgage loans was also raised as a key task.

Data presented by Social Democratic Party lawmaker Han Chang-min (한창민) showed that as of the end of the second quarter this year, outstanding mortgage loans totalled 767 trillion won, of which pure fixed-rate loans were about 100 trillion won. That was about 13 percent of the total.

The share of pure fixed-rate loans in new lending fell to about 10 percent recently from 19 percent in the fourth quarter of 2023.

Lawmakers said the scale of loans exposed to interest-rate fluctuations is also significant. Mortgage loans facing interest-rate resets over the next 5 years were put at about 165 trillion won.

Han said that if interest-rate resets coincide with a period of rising rates, households' principal and interest repayment burdens could increase. He stressed the need to expand the supply of long-term fixed-rate loans.

The Financial Services Commission said that to increase long-term fixed-rate loans, incentives for borrowers and banks' long-term funding procurement structure should be improved together.

On criticism that a task force formed last year to promote long-term fixed rates had been suspended, the commission said working-level consultations are continuing.

Financial authorities said they plan to review financial market structure and institutional improvement measures so banks can expand origination of long-term fixed-rate loans.