Government's Pledge to End Policy Audits in Question as BAI Probes FSC Working-Level Staff over Leveraged ETF Controversy

Audit Controversy Over Single-Stock Leverage Focused on FSC Working-Level Officials
BAI: "No Additional Audit Underway"
Concerns Rise Over Clash With Policy Audit Abolition Policy

While the Lee Jaemyung administration has publicly declared the abolition of "policy audits," the Board of Audit and Inspection was found to have conducted individual audits targeting working-level staff at the Financial Services Commission responsible for introducing single-stock leveraged exchange-traded funds (ETFs). With the sharp fluctuation in prices and significant individual investor losses following the launch of single-stock leverage products, some interpret this move as the Board examining not only the financial products themselves but also the overall policy implementation process. The financial sector has voiced concerns that these audits may amount to "tail-cutting audits," where post-hoc responsibility is placed on the working-level staff who merely executed instructions rather than on those who made decisions about policy direction, potentially chilling the public sector's willingness to act.

According to government and National Assembly officials on August 12, the Board of Audit and Inspection conducted individual interviews during its audit last month with working-level Financial Services Commission staff, including the Asset Management Division manager. The Asset Management Division is the department responsible for introducing new products such as single-stock leveraged ETFs. The Board's move to expand the scope of its audit to include the working-level department that promoted the launch of leveraged ETFs comes after beginning an audit in June reviewing the status of financial investor protection at both the Financial Services Commission and the Financial Supervisory Service.

However, the Board of Audit and Inspection denied that any additional audits are underway. An official from the Board stated, "We have not conducted any additional field visits or audits after the official audit period was over," and added, "We only held a single interview during the audit process with the asset management manager at the Financial Supervisory Service to verify facts." The official continued, "While we have examined general leveraged products such as inverse and leverage ETFs, we have not conducted a separate audit specifically on single-stock leveraged ETFs."

According to the Board’s statement, the audit of the Financial Services Commission and Financial Supervisory Service was conducted over 20 days starting June 24 and has already concluded. At the time, the Board explained that this audit was part of a pre-scheduled annual plan and was not aimed at judging the rightness or wrongness of policy, but rather focused on checking whether relevant laws, regulations, and self-regulation were being properly followed. Regarding the single-stock leveraged ETFs, the Board clarified that its purpose was not to assess the legitimacy of the product itself, but to examine whether safeguards for vulnerable groups and general investors under the Financial Consumer Protection Act were appropriately established.

Nevertheless, multiple officials from the National Assembly, the Financial Services Commission, and financial circles have reported that the Board of Audit and Inspection recently re-examined the policy implementation process of the working-level staff at the Financial Services Commission, specifically with regard to single-stock leverage products. With controversy surrounding leveraged products intensifying, there is speculation that this essentially amounts to a follow-up audit, separate from the initial review of investor protection measures in the financial market.

The single-stock leveraged products were listed in Korea for the first time on May 27. The Financial Services Commission introduced these products to address a regulatory imbalance between domestic and overseas ETFs and to encourage investment demand to remain in the domestic market rather than flow overseas. However, after listing, product prices showed extreme volatility. As of the closing price on the 11th, "KODEX Single-Stock Leverage Samsung Electronics" had fallen by 48.0% to 10,400 won from its initial listing price of 20,000 won. "KODEX Single-Stock Leverage SK hynix" plummeted 62.8% to 7,435 won from its initial offering price.

Losses for individual investors are also considerable. According to NH Investment & Securities client data, as of August 4, the proportion of investors who have incurred losses in "KODEX Single-Stock Leverage Samsung Electronics" and "KODEX Single-Stock Leverage SK hynix" stood at 95% and 94%, respectively.

This audit has drawn criticism for being at odds with the administration's emphasis on abolishing "policy audits." The Lee Jaemyung administration has sought to avoid policy audits in order to foster an environment where government officials can act according to their convictions, even listing the abolition of policy audits as a government achievement. Policy audits refer to a practice where the Board of Audit and Inspection retrospectively judges not just the legality or possible corruption in the policy-making process, but the policy’s merits themselves.

The financial sector points out that if the scope of the audit is expanded to address the policy decisions or working-level decision-making process at the time of the single-stock leverage product’s introduction, it is essentially no different from a policy audit. Particularly as the decision to introduce these products was not made solely by working-level staff, criticism has arisen that it is unreasonable to hold the executing department responsible simply because market conditions have deteriorated.

One financial sector official said, "This audit has created a climate of concern not only at the Financial Services Commission, but also at affiliates and research institutions, where staff who authored reports or made statements about leveraged products worry they may be called as witnesses or references," and added, "If taking proactive measures leads to accusations of abuse of power after the fact, and if cautious approaches are labeled as dereliction of duty, how can public officials maintain a sense of mission and push ahead with new policies?"

This content was produced with the assistance of AI translation services.