Second Half of 2022 Reality Revealed
Poor Risk Management and Internal Controls in Securities Industry
Financial authorities have taken steps to resolve the issue of maturity mismatch management in trust and wrap accounts, which has been identified as a widespread problem in the securities industry.
On the 19th, the Financial Services Commission announced that it will conduct a legislative notice and regulatory change notice for the amendment of the "Enforcement Decree of the Capital Markets and Financial Investment Business Act" and the "Financial Investment Business Regulations" as follow-up measures to improve asset management-related systems.
The amendment includes △ improving issues arising from maturity mismatch management of trust and wrap accounts, strengthening investor protection by introducing disclosure for product-type trusts related to the trust business, expanding the scope of assets that can be entrusted, and △ institutionalizing administrative guidance and official interpretations related to asset management.
Maturity mismatch management of trust and wrap accounts was pointed out as a problem during the tightening of the capital market in the second half of 2022. When customers requested redemption of their trust and wrap investments, securities firms raised redemption funds through linked and replacement transactions. It was revealed that some in the industry operated products with mismatched maturities contrary to the original agreement with customers, resulting in poor risk management and internal controls.
The amendment mandates that securities firms obtain prior consent from customers before conducting maturity mismatch investments through trust and wrap accounts. Financial investment businesses entering into trust and wrap contracts must compulsorily establish risk management standards. They must invest in accordance with the maturity agreed upon with the customer and, in cases of market changes such as interest rate fluctuations, replace financial investment products with maturities longer than the trust or wrap contract period, including measures to minimize investor losses.
The Financial Supervisory Service will strengthen investor protection related to the trust business and introduce insurance claim rights trusts. Until now, trusts have been criticized for insufficient investor protection due to the lack of regulation such as comparison and disclosure of trust fees, considering the one-to-one contract nature of trusts.
The amendment obligates product-type trusts, which have strong investment product characteristics, to provide customers with comparative explanations regarding the method of receiving trust fees. It also requires the average fee rate to be disclosed on the Korea Financial Investment Association’s website. Furthermore, the amendment applies the same explanation obligations and operational regulations to the management of money included in comprehensive property trusts as those applied to money trusts. Insurance claim rights trusts for insurance contracts that meet certain requirements such as coverage, contract characteristics, structure, and beneficiaries will also be permitted.
Regulations related to asset management businesses, which have been operated through administrative guidance and official interpretations, will also be institutionalized. The operation of land trust business by integrated trust operators (banks, securities firms, insurance companies), which is currently restricted through administrative guidance, will be explicitly stipulated through the amendment of the enforcement decree. This is significant in preventing the transmission of real estate development failure risks to the financial system caused by integrated trust operators based on financial businesses handling real estate development tasks.
The Financial Services Commission plans to promote system improvements to allow insurance claim rights to be entrusted, in consultation with the Ministry of Justice. This will permit insurance claim rights trusts for insurance contracts that meet certain requirements such as coverage, contract characteristics, structure, and beneficiaries.
The amendment will be open for legislative notice and regulatory change notice from the 19th of this month until April 29. Subsequently, it will undergo review by the Regulatory Reform Committee, the Ministry of Government Legislation, and approval by the Deputy Prime Minister’s meeting and the Cabinet meeting, with implementation expected in the third quarter.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
