Financial Supervisory Service Notifies 'Mirae Asset' Group of 9 Management Cautions and Improvements

Financial Supervisory Service Group Financial Supervision Office Notifies 3 Management Cautions and 6 Improvement Items
Early Warning System Effectiveness Declines... Inadequate Risk Concentration Limit Management in Financial Groups
Risk Management and Internal Control Council Agenda Delivered Just Before Meetings... Limits on Prior Review
Insufficient Management System for Internal Transactions and Executive Concurrent Positions

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

Financial authorities plan to strengthen risk management and internal control supervision of financial conglomerates, and the Financial Supervisory Service (FSS) has recently notified one such conglomerate, Mirae Asset, of nine management cautions and improvement items, including inadequate overseas subsidiary management systems and insufficient early warning system standards.

According to financial authorities on the 24th, the FSS Financial Group Supervision Office recently communicated a total of nine corrective actions to Mirae Asset based on inspection results, comprising three management cautions and six improvement items. Currently, seven groups are designated as financial conglomerates: Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, DB, and Daou Kiwoom. Large corporations with total assets exceeding 5 trillion won that operate two or more financial businesses among deposit-taking and lending, insurance, and financial investment, or have at least one company licensed by the Financial Services Commission, are subject to designation as financial conglomerates.

The FSS first determined that improvements are needed in the risk management and internal control systems for Mirae Asset’s overseas subsidiaries. Given the group’s focus on global investment, it is desirable that overseas subsidiaries be included in the internal control and risk management council’s oversight, but this was not the case, and the results of the risk management council meetings were not being communicated. Mirae Asset has formed a risk management council comprising four domestic affiliated financial companies?Mirae Asset Securities, Asset Management, Capital, and Life Insurance?and oversees each overseas subsidiary. Mirae Asset’s overseas subsidiaries account for 92 out of 123 affiliated financial companies.

The FSS explained, "Considering the financial and strategic importance of overseas affiliated financial companies, it is necessary to pay attention to the composition of the council by including a Mirae Asset Securities entity that oversees overseas affiliates in the internal control and risk management council."

"Early warning system operation lacks effectiveness" management caution... Group risk concentration limit management also insufficient

The effectiveness of the early warning system, established to recognize and respond to crisis situations early, was also pointed out as needing improvement. Some credit sector indicators used as criteria for issuing early warnings were set too high compared to recent market conditions. In particular, some criteria for domestic and international credit event indicators were found to be unclear.

Additionally, the integrated crisis situation analysis conducted internally revealed that despite high exposure and expected financial losses within the group during default risk scenarios, default rate indicators were not managed as crisis management indicators, and exposure to commercial real estate in certain regions was held without managing the corresponding regional indicators.

Furthermore, the FSS issued management cautions emphasizing the need to strengthen risk concentration limit management and prior review procedures affecting group soundness. Although the representative financial company submits matters related to risk concentration?such as major shareholder credit extensions, affiliate investments, and joint investments by affiliated financial companies?to the risk management council agenda quarterly, the FSS judged that this only amounts to checking exposure increase or decrease status.

It particularly criticized the absence of an "integrated limit management system" that sets group-level limits and regularly monitors exposure limit utilization rates. The scope of prior review was also diagnosed as narrow, limited to self-capital investment cases deliberated and approved by the boards and risk management committees of four major domestic affiliated financial companies.

The FSS recommended, "A practical prior review system should be established and operated by comprehensively considering the types, scale, characteristics, and conditions of risk concentration, expanding the scope of prior inspections, or clarifying inspection criteria."

[Image source=Yonhap News]

Agenda items delivered on average 1.1 business days before meetings... Overseas subsidiary cooperation, internal transactions, and executive dual roles management systems inadequate

Following three management cautions, the FSS also notified six improvement items, including sufficient prior review of agenda items, specifying cooperation obligations of overseas subsidiaries, improving conflict of interest reporting systems, and strengthening management systems for internal transactions and executive dual roles.

The FSS judged that the board of directors convenes on average 4.6 business days and 3.5 business days after the internal control and risk management council meetings, and meeting materials are delivered on average 1.1 business days before the council meetings, indicating insufficient prior review. It was notified that improvements are needed to allow outside directors of the board and the council to adequately review agenda items before meetings, and to set sufficient deadlines for affiliated financial companies to provide materials to address operational shortcomings.

The FSS also requested the specification of cooperation obligations for affiliated financial companies and improvements to the reporting system to prevent conflicts of interest among executives and employees. The FSS confirmed that despite Mirae Asset’s high proportion of overseas subsidiaries, each subsidiary has not reflected cooperation obligations toward the representative financial company in their internal regulations, and ordered formalization of this. Furthermore, since internal control evaluations and inspections of overseas subsidiaries are not being conducted, the system should be improved to ensure consistent operation. Regarding conflict of interest prevention among affiliated financial company executives and employees, it was pointed out that internal regulations should be revised to require reporting to the representative financial company’s compliance officer or dedicated organization.

Improvements were also deemed necessary for the system controlling internal transactions within the conglomerate and dual roles of executives in affiliated financial companies. Since Mirae Asset managed internal transactions only when the counterparty was an affiliate company, it was pointed out that the scope should be changed to focus on internal transactions that are not between affiliates according to the Financial Conglomerate Act.

The FSS further pointed out that internal control is limited because Mirae Asset only requires prior review by the representative financial company when overseas subsidiary executives concurrently serve as registered executives of major domestic and foreign affiliated non-financial companies (with total assets of 1 trillion won or more). The FSS explained, "We hope that the representative financial company improves the conflict of interest prevention system related to executive dual roles by reviewing the appropriateness in advance even when executives of overseas affiliated financial companies concurrently serve as executives of other affiliated financial companies."