Financial Conglomerates, Sanctions Eased When Internal Standards Are Reported in Advance (Comprehensive)

Reannouncement of Enforcement Decree One Month After Initial Notice
Exemption Possible with Thorough Internal Control and Risk Management Preparation
Certain Fines Increased to 50 Million Won

[Asia Economy Reporter Song Seung-seop] The Financial Services Commission (FSC) is revising regulations to somewhat ease the burden on target companies ahead of the enforcement of the "Financial Conglomerate Supervision Act." This measure comes as six non-bank financial groups with assets exceeding 5 trillion won, including Samsung and Hyundai Motor, are set to be supervised starting from the end of June. The authorities plan to exempt companies from administrative actions if they establish internal standards for risk management and report them in advance.

According to financial authorities on the 8th, the FSC recently re-announced the draft enforcement decree of the Financial Conglomerate Supervision Act containing these provisions.

The Financial Conglomerate Supervision Act mandates that groups with total assets of 5 trillion won or more and owning two or more companies in the fields of deposit-lending, financial investment, and insurance be subject to financial supervision. Six groups fall under this category: Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, and DB.

The bill was promulgated after passing the National Assembly in December last year, and the enforcement decree was announced for legislative notice on the 9th of last month in accordance with the Administrative Procedures Act. From the 1st, a prior notice containing detailed supervisory regulations delegated by the law and enforcement decree was also implemented. The re-announcement of the enforcement decree came about a month after the legislative notice and one week after the detailed supervisory regulations were published.

Accordingly, the target companies must establish standards and procedures to manage risks arising from the duties performed by their affiliated company executives and various transactions such as asset management. When a representative financial company is designated among affiliates, it will perform internal control, risk management, and soundness management tasks and report to the FSC. A council composed of affiliated financial companies must also be established and operated.

The re-announced enforcement decree stipulates that if a company prepares and reports "internal control standards" and "risk management standards" to the FSC, it will be exempt from administrative actions even if violations of the law are detected. The internal control standards should include management plans for ▲internal transactions among affiliates ▲business consignment and delegation ▲joint investments, while the risk management standards should reflect ▲group-level crisis management systems ▲early warning systems ▲crisis situation analysis. The enforcement decree means that if the provisions stipulated by law are faithfully implemented, related standards violations will not be punished except in malicious cases such as false reporting or non-compliance with orders.

Within the industry, there had been significant concerns that the passage of the Financial Conglomerate Supervision Act would strengthen regulations and increase the burden on companies. The financial authorities maintain that this is not a double regulation since the supervision differs entirely from existing regulations in individual business sectors, but there have been criticisms that the financial authorities' monitoring and sanctions on internal transactions among affiliated financial companies are somewhat excessive.

Authorities: "Consensus that some administrative actions are excessive... Burden on companies will be eased"

An FSC official explained, "There was a consensus within the authorities that imposing administrative actions on companies for minor mistakes was excessive," adding, "The addition of exemption clauses in the enforcement decree will also reduce the burden on companies." However, the official noted, "There were no direct opinions or protests from companies."

The draft also includes a plan to increase fines for certain items. The existing enforcement decree stipulates a fine of 20 million won for institutions that fail to comply without justifiable reasons with orders such as submission, modification, or supplementation of management improvement plans or administrative disposition procedures. However, the newly announced enforcement decree raises this to 50 million won.

The financial authorities state that the purpose is not to strengthen punishment levels. Since the maximum fine specified by the Financial Conglomerate Supervision Act is 100 million won, the minimum fine for institutions had to be set at 50 million won. An FSC official explained, "The institution's fine must be at least half of the maximum fine stipulated by law," adding, "The Ministry of Government Legislation informed us that some fine regulations violate this and need to be corrected."

Individuals and organizations with interests in the draft enforcement decree can submit opinions to the Financial Group Supervision Innovation Team under the FSC. The re-legislative notice period lasts until the 19th.

Meanwhile, the Financial Conglomerate Supervision Act will be fully enforced from June 30. Target companies must manage their capital ratios to ensure that actual loss absorption capacity (consolidated capital) is maintained above the minimum capital requirement (consolidated required capital). They will also be evaluated on five levels for items including internal control and risk management system operation, capital adequacy maintenance policies, and management of risk concentration, internal transactions, and risk transfer.