The Financial Supervisory Service’s ambitious plans to drive out two KB chiefs ended anticlimactically after the pair ― KB Financial Group chairman Lim Young-rok and KB Kookmin Bank president Lee Kun-ho ― received light penalties last week.

The nation’s top financial watchdog now faces a barrage of criticism for issuing empty threats.

On Friday, Lim and Lee were given “reprimands” for a high-profile spat over replacing Kookmin Bank’s computing system, and their roles in loan fraud at the bank’s Tokyo branch. A reprimand is a relatively low-level sanction, and more importantly, means that the two executives won’t have to worry about keeping their jobs.

The move came months after the FSS had been turning a deaf ear to pleas from the local financial industry that while the loan scandal in Japan may warrant punitive action, it did not make sense to hand down heavy sanctions for what was seen to be nothing more than a power struggle.

FSS Gov. Choi Soo-hyun had repeatedly said the FSS would remain “independent” from outside opinions and “adhere to the law and principles.”

The current outcome, therefore, is the worst possible scenario for the FSS, according to an official from the watchdog who declined to be identified.

In May, the FSS announced that it would impose mass sanctions on over 200 financial company officials, including Lim and Lee.

But after months of fruitless discussions, its nine-member disciplinary committee decided to lower severity of the sanctions, citing the lack of tangible proof.

“The committee agreed in a vote that Lim and Lee aroused public criticism but should not be subject to heavy sanctions or face ousters,” an official of the committee was quoted as saying.

Also, their conflict over the bank’s computing system is an internal issue ― something many in the financial industry has been pointing out for the past three months.

Related labor unions opposed the decision.

“The FSS proved itself to be incapable of neutral financial supervision,” said the Korean Financial Industry Union in a statement. “Both Lim and Lee should resign, and so should the FSS governor to take responsibility for amplifying this conflict and causing damages (to KB Financial.)”

KB Kookmin, the nation’s top bank in terms of profits, achieved almost no growth in its loan business during the three months following the FSS’ sanction announcement, according to officials.

The feud-ridden bank even skipped a yearly strategic meeting, at which it was to renew its sales and profit target line for 2014.

Both Lim and Lee were absent when the FSS made its decision last weekend, as they were attending an executive workshop held in a Gyeonggi Province temple.

“The temple stay was a prearranged event,” said an official of KB Financial, denying suspicions that the company was informed of the FSS verdict in advance.

By Bae Hyun-jung (tellme@heraldcorp.com)