South Korea’s Woori Financial Group is likely to have a tough week ahead, as the financial watchdog’s recent decision to impose sanctions on its chairman threatens its governance.

Woori Financial’s regular board meeting is scheduled Friday, and an intense round of discussions is expected to take place over the fate of Woori Financial Group Chairman and Woori Bank CEO Sohn Tae-seung.

The Financial Supervisory Service on Thursday slapped Sohn and Hana Financial Vice Chairman Ham Young-joo with “reprimands” and “warnings” -- two of the heaviest penalties the watchdog can impose. They were held responsible as top executives of financial institutions accused of misselling high-risk derivatives-linked funds to customers without properly notifying their customers of the risks involved.

The sanctions committee’s decision requires final approval by either the FSS governor or the policymaking Financial Services Commission, in order to carry legal weight.

The Woori Financial board, which consists of seven internal and external members including Sohn, will have to decide whether to accept the FSS’ decision or fight it. The latter choice could involve a messy lawsuit.

Sohn, tapped to serve a second term as the holding group’s chairman in December, now faces major obstacles, since people who have received such severe penalties from the FSS are barred from working in the financial sector for three to five years.

Despite a rule stating that leaders in that situation are allowed to complete their current terms, there is little time for Sohn and his supporters to decide the best course of action. His current term ends in March.

The FSC said Friday that the “sanctions process” is expected to be completed by early March, without mentioning a precise date.

To retain his position for a second term, Sohn would have to seek to delay finalization of the sanctions until Woori Financial’s shareholders meeting in March, where his reappointment is expected to be confirmed.

In this case, Sohn is likely to file an injunction to prevent the sanctions from immediately taking effect. Sohn would be able to start and complete his second term even if the sanctions were to take effect under the current rules.

In 2014, then-KB Financial Chairman Lim Young-rok filed an injunction against the financial authorities’ decision to hand him a suspension for mishandling internal affairs. But Lim was forced to step down after a vote by the financial group’s board.

Sohn, unlike Lim, apparently has the full support of the Woori Financial board, which grants him more leverage to maintain his chairman position. He was reelected unanimously in December by a committee consisting of six external board members.

If the board chooses to ask Sohn to step down, Woori Financial will have to cope with a massive leadership vacuum.

The financial giant has already delayed the appointment of a CEO for its banking unit, Woori Bank, more than twice since early January due to “current circumstances,” implying that it has been adjusting the time frame around the FSS announcement. Sohn’s possible departure could rattle the group’s governance, if it fails to find an apt replacement soon.

Sohn has led Woori Financial’s key business unit Woori Bank since 2017 and took the helm of the holding group in November 2018. He is expected to step down as CEO of the bank if his reappointment as Woori Financial Group chairman is finalized.

By Jung Min-kyung (mkjung@heraldcorp.com)