Designation as a Financial Conglomerate in July... Internal Controls and Regulations to Apply from Year-End

Continuous Implementation of the 'Financial Group Supervision Best Practices' for 6 Months

[Asia Economy Reporter Jin-ho Kim] Samsung and Hyundai Motor, among others, will be designated as financial conglomerates next month. The designated financial conglomerates will be subject to regulations such as internal control and risk management about six months after the designation date, around the end of the year.

On the 24th, the Financial Services Commission announced that it had completed the establishment of subordinate regulations under the "Act on the Supervision of Financial Conglomerates," which is based on this content. The Financial Conglomerates Act was prepared to introduce group-level supervision, which had been neglected for non-holding type financial conglomerates, to promote sound management and financial market stability.

According to the bill, groups with total assets of 5 trillion won or more and engaged in two or more businesses (deposit-taking and lending business, securities business, insurance business) are designated as financial conglomerates by July 31 every year. However, if the total assets of non-core businesses are less than 5 trillion won or if the assets of insolvent financial companies exceed 50% of the total assets of the financial conglomerate, the group is excluded from designation. Based on assets and business types as of the end of 2019, six groups including Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, and DB are mentioned as candidates for designation.

With the establishment of subordinate regulations, the internal control and risk management matters of financial conglomerates have also been specified. Procedures that executives and employees must comply with for sound management have been regulated, and measures to prevent conflicts of interest and the establishment and operation of dedicated internal control departments have been reflected.

In addition, standards for evaluating the capital adequacy of financial conglomerates have been established. If internal transactions exceed 5 billion won (or 5% of equity capital, whichever is less), board approval must be obtained. From the perspective of protecting financial consumers, matters related to ▲ownership and governance structure ▲internal control and risk management ▲capital adequacy must be reported and disclosed.

Furthermore, the supervisory authorities will conduct a risk management practice evaluation every three years to assess the risk status and management practices of financial conglomerates. If the capital adequacy ratio is below 100% or if the risk management practice evaluation results in a grade of 4 or lower, a "management improvement plan" to enhance financial soundness must be submitted.

The Financial Services Commission decided to apply these regulations six months after the designation date of the financial conglomerates. However, to prevent a gap in soundness supervision, the "Model Code for the Supervision of Financial Groups" will be operated for about six months after the law comes into effect until the regulations are applied.

A Financial Services Commission official explained, "We are thoroughly preparing to avoid confusion by conducting employee training ahead of the law's enforcement," and added, "We will continue to communicate to ensure that the financial conglomerate supervision system is firmly established after the law is enforced."