Samsung and Hyundai Motor Strengthen Internal Controls... Financial Authorities Announce Improvement Measures

Establishment of Pre-Review and Personnel Exchange Standards for Affiliate Transactions
Centered on the Group's Internal Control Dedicated Department

Internal controls for financial conglomerates such as Samsung and Hyundai Motor will be strengthened. The financial authorities have developed internal control improvement measures together with these groups, and a draft amendment to supervisory regulations, which includes improvements to additional risk assessment criteria, has also been prepared.

The Financial Services Commission and the Financial Supervisory Service jointly announced on the 2nd the "Internal Control Improvement Measures for Financial Conglomerates," containing reasonable judgment criteria related to group internal controls, in cooperation with seven financial conglomerates (Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, DB, and Daou Kiwoom). They established the scope of affiliated financial companies to which group internal control standards apply?something not previously specified in laws?criteria for prior review of joint and mutual transactions among affiliates above a certain scale, and specific management standards for personnel exchanges such as concurrent or transferred executives among affiliates. The financial authorities explained that this is to further enhance the effectiveness of the groups’ own internal control functions.

First, reasonable judgment criteria were established regarding the scope of affiliated financial companies. In principle, the internal control standards apply to companies actually engaged in financial business. However, for companies closely related to financial business, the standards apply if they have a compliance officer appointment obligation under the Governance Act or if the number of employees exceeds a certain level (for example, five or more). Overseas affiliated financial companies will be flexibly applied by excluding those below a certain scale or adjusting (excluding or modifying) the scope of some internal control standards.

Kim Ju-hyun, Chairman of the Financial Services Commission, is delivering opening remarks at the 'SME Finance Difficulty Inspection Council Kickoff Meeting' held on the 22nd at the Korea Federation of SMEs in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

For joint and mutual business among affiliates, the group’s dedicated internal control department must conduct a prior review. Transactions with overseas affiliates within the group are subject to prior review if the transaction involves a domestic affiliate as one of the parties. Management standards necessary for performing tasks will be established centered on the dedicated internal control department, and the management status must be regularly reported to the internal control council and the board of directors.

The scope of prior review will also be expanded to manage risks arising from personnel exchanges such as concurrent or transferred executives among affiliates. The dedicated internal control department will conduct prior reviews focusing on concurrent positions between non-financial and financial affiliates. Concurrent executive positions with overseas affiliated financial companies will be subject to ex-post appropriateness review by the dedicated internal control department.

The seven financial conglomerates agreed to promote the operation of a permanent consultative body for financial conglomerates to strengthen internal control capabilities collectively rather than at the individual group level. Through this, they plan to continuously pursue internal control supplementation and improvement tailored to the characteristics of each group in response to changes in domestic and international financial and economic environments.

Meanwhile, the Financial Services Commission will announce a notice of regulatory changes regarding the draft amendment to the "Supervisory Regulations for Financial Conglomerates," which includes improvements to additional risk assessment criteria for financial conglomerates.

The financial authorities plan to subdivide the scoring ranges of internal control and risk management evaluation items to enhance the discriminatory power of the evaluations. To prevent the recurring internal control failures of financial institutions and to encourage stronger group-level internal control management, the weighting of internal control and risk management evaluation items in the additional risk assessment will be increased from 20% to 30%. The differences in risk-weighted capital surcharges imposed based on the results of the additional risk assessment will be consistently adjusted across grades. This amendment is expected to complete the revision process in the second quarter of this year and will be implemented from the date of notification.