'Strengthening Internal Controls' Financial Company Governance Amendment Law Enforced... "Accountability Structure to be Pilot Operated"

"Incentive Review Including Non-Action Opinion Letter Upon Participation"
Publication of Accountability Structure Guidebook
Detailed Explanation from Accountability Scope to Internal Control Committee Operation

Starting today, the "Act on the Governance of Financial Companies," which includes the introduction of a responsibility structure diagram and strengthening of internal controls in the financial sector, will be enforced. The financial authorities have prepared a guidebook containing detailed information on the responsibility structure diagram and responses to inquiries from the financial sector. However, since the submission deadline for the responsibility structure diagram is scheduled for January next year for financial holding companies and banks, it will take some time before the law is fully applied. The authorities stated that they will encourage early adoption of the responsibility structure diagram by allowing financial companies to receive consulting from the authorities during a pilot operation period.

The Financial Services Commission and the Financial Supervisory Service published a guidebook on the 2nd containing various inquiries from the financial sector related to the amended governance law. The guidebook includes answers regarding the concept, allocation, scope, implementation, and sanctions of responsibilities in the responsibility structure diagram, as well as inquiries about the operation of the internal control committee. Based on this, financial companies must revise and supplement their responsibility structure diagrams and submit them to the financial authorities. A total of 63 banks and financial holding companies must submit their responsibility structure diagrams by January 2 next year. Comprehensive financial companies and insurance companies with total assets exceeding 5 trillion KRW or managed assets exceeding 20 trillion KRW must prepare theirs by July 2 next year, while other specialized credit finance companies and mutual savings banks must prepare theirs by July 2026 and July 2027, respectively.

Before the full-scale introduction and enforcement of the responsibility structure diagram, the financial authorities plan to disclose operational guidelines to enhance the predictability and transparency of internal control sanctions after collecting opinions from the financial sector. There are concerns that financial companies wishing to implement the responsibility structure diagram quickly due to fear of sanctions may have no incentive to submit the diagram to the authorities. Therefore, a pilot operation period will be introduced to encourage early adoption and operation. Financial companies participating in this will receive incentives. One likely incentive under consideration is the issuance of a non-action letter confirming that no sanctions or other measures will be taken in the future.

A Financial Services Commission official stated, "Since the authorities provide consulting for financial companies during the pilot operation period, financial companies that have prepared the responsibility structure diagram can submit it quickly during this period, which naturally extends the time available for revisions. Therefore, participating in the pilot operation is considered the best approach."

Financial Authorities Publish Guidebook on Responsibility Structure Diagram... "Explaining from Scope of Responsibilities to Internal Control Committee Operation"

First, responsibility refers to the accountability for the execution and operation of internal controls and risk management regarding matters that financial companies or their executives and employees must comply with under financial-related laws and regulations. It is distinguished from tasks in that it pertains to the execution and operation of internal controls to prevent violations of laws during the course of work.

Responsibilities can be allocated not only to financial company executives and employees but also to executives of other companies who have practical influence over the responsibilities. For effective operation of internal controls, responsibilities need to be allocated to executives performing tasks related to those responsibilities. However, if the tasks of senior and junior executives coincide, responsibilities should be allocated to the senior executives and may not be allocated to the junior executives. If there are executives of other companies influencing the responsibilities, responsibilities should be allocated to those executives. If allocation is not intended, measures must be taken to prevent those executives from influencing the responsibilities.

The term "financial-related laws and regulations" in responsibilities includes foreign financial laws. However, there is no need to allocate responsibilities to domestic financial company executives for compliance with foreign laws at overseas branches of domestic financial companies where the financial authorities cannot exercise supervisory rights. For matters where the authorities can exercise supervisory rights, such as when violations of foreign laws impair the soundness of domestic financial companies, responsibilities related to the management of overseas branches should be allocated to executives.

When preparing the responsibility structure diagram, CEOs and others must ensure there are no omissions, duplications, or biases in responsibilities. Small-scale financial companies with few executives, such as domestic branches of foreign financial companies, should make judgments considering this. Executives who are allocated diverse responsibilities due to the nature of their various tasks are not considered to have biased responsibilities.

The responsibility structure diagram must be prepared through a resolution of the board of directors. When passing the board resolution, to prevent omissions of responsibilities due to executive vacancies, the executives or employees who will be allocated those responsibilities in case of vacancies must be pre-designated. If multiple executives are appointed or dismissed on different dates, the board can resolve changes to the responsibility structure diagram in the same meeting without holding separate meetings. If changes to the responsibility structure diagram are necessary, they must be approved by the board and submitted to the financial authorities.

CEOs and others assigned overall internal control management duties must take management measures and report the content and results to the board of directors. Executives allocated responsibilities are also assigned the same management duties and must report related content and results to the CEO and others. If the CEO or executives responsible for duties violate management obligations, they may be subject to sanctions. The internal control management duties under the amended governance law apply from the time the financial company prepares and submits the responsibility structure diagram to the financial authorities.