A court ruling that nullified a penalty for Woori Financial Group Chairman and Chief Executive Officer Sohn Tae-seung signals clemency for other chiefs of banks and other financial institutions who have been blamed for their role in a series of private fund misselling scandals, industry sources said Monday.

The ruling by the Seoul Administrative Court Friday was in favor of Sohn, rescinding a “reprimand” warning on the banking group chiefs by the Financial Supervisory Service. The penalty was to thwart Sohn, who is now serving a second term, and Hana Financial Group Chairman Ham Young-joo from landing new jobs in the finance sector for at least three years after their chairman terms finish.

Woori Financial Group filed a lawsuit against the FSS and an injunction to suspend the penalty in March 2020, as soon as the financial watchdog recommended the regulator, the Financial Services Commission, hand down the penalty. Woori won the injunction, which allowed Sohn to stay in the position nonetheless.

Industry sources say the key to the litigation was whether a failure for a fund seller to abide by internal control standards -- as seen in a misselling of private funds to its clients -- can be construed as a violation of the Act on Corporate Governance of Financial Companies.

The court ruling stated that there is no legal ground to impose a penalty to a staff member or an executive of a financial institution for “a failure to abide by internal control standards, not a failure to establish them.” The FSS has yet to decide whether to appeal as of press time.

The Korean rule stipulates that every financial company “shall establish standards and procedures that its executive officers and employees shall observe when they perform their duties.”

This coincided with the arguments by legal representatives of the heads of financial institutions that an executive cannot be held responsible under Korean rules for failing to implement the existing internal control standards when misselling products, such as private funds associated with derivatives-linked securities or hedge funds.

“The question is whether there is a precondition to implement internal control standards under which employees and executives perform their duties, if there is a set of standards already existing,” a source familiar with the matter told The Korea Herald on condition of anonymity.

“It is nonsense for a top official of a bank to be held accountable for employees’ deviation that triggered a financial scandal (without clarifying the condition) under a law that does not exist.”

Korea has yet to stipulate under which condition an internal control standard should be implemented. But starting September, Korea is expected to put a new set of rules into effect to urge financial institutions to define the condition under the controversial Act on the Protection of Financial Consumers.

Meanwhile, the ruling is likely to influence the financial regulator’s decision on the level of penalty imposed on other leaders of financial institutions embroiled in the misselling scandal.

The regulator has sought to postpone its final decision on the level of penalty to the heads of financial institutions in Korea after the ruling on Sohn, as the FSS has based its penalty recommendations on the level of breach of internal control obligations.

The ruling will imminently affect Hana Financial Group Chairman Ham Young-joo, who filed a similar complaint against the FSS to bring the case to court after the “reprimand” penalty recommendation along with Sohn. Ham and Sohn were held accountable for a lack of internal control to curb misselling of derivatives-linked products.

Heads of Korea’s brokerage houses, which had distributed scandal-ridden private funds, could also be subjected to a retrial.

So far, former KB Securities co-CEO Yoon Kyung-eun, former Shinhan Investment President Kim Hyung-jin and incumbent Korea Financial Investment Association Chairman Na Jae-chul, who was the ex-chief of Daishin Securities, were given “suspension,” a tougher penalty than “reprimand,” for a hedge fund scandal involving alleged fraudulent practices by the fund managers.

Moreover, NH Investment & Securities CEO Jeong Young-chae and KB Securities co-CEO Park Jeong-rim were recommended a “reprimand” penalty for the hedge fund fiasco.

These companies were blamed for selling private funds managed by allegedly fraudulent fund managers such as Lime Asset Management and Optimus Asset Management.