FSS to Conduct Additional On-Site Inspections of Responsibility Structures at Holding Companies and Banks in August

Preparation of Executive Manuals and Compliance with Six Key Management Duties Urged
Financial Sector on Alert as CEO's Overall Management Duty Included

The Financial Supervisory Service (FSS) is expanding the scope of its review of responsibility structure management, moving beyond executive interviews at the four major commercial banks (KB Kookmin, Shinhan, Woori, Hana) to include holding companies and regional banks. As early as mid-next month, the FSS will begin additional on-site inspections of holding companies and banks.

This inspection process is fundamentally different from an examination, as it involves speeding up data collection on-site rather than investigating violations. However, the financial sector is on edge because holding companies are now included in the inspection scope, and the FSS will also be reviewing the "overall management duty of the CEO."

According to financial authorities and industry sources on July 10, the FSS will conduct additional on-site inspections of the responsibility structures at holding companies and banks next month. Around 10 institutions are expected to be targeted, though details have not yet been finalized.

Initially, it was reported that all holding companies and banks (including regional banks) would be reviewed, with some regional banks undergoing only a written inspection. Currently, the most likely scenario is that the FSS will conduct a sampling inspection of major holding companies and banks, while the remaining institutions will be subject to written inspections.

The on-site inspections are scheduled to begin as early as mid-next month. The FSS will observe a three-week inspection moratorium from July 21 to August 8, taking into account the summer vacation period. Therefore, on-site inspections are expected to take place after August 11.

The FSS will notify major holding companies and banks of the inspection next month. An FSS official stated, "We cannot confirm the exact timing of the inspection."

During the on-site inspection, the FSS will check whether recommendations have been implemented and whether the CEO's overall management duty has been fulfilled. Specifically, the FSS will examine whether a management manual for executives at the department head level or higher has been prepared, as well as the implementation of the six key management duties required by the Act on Corporate Governance of Financial Companies. The CEO's overall management duty is also included in the inspection scope.

Previously, on July 4, the FSS held a "Banking Sector Internal Control Workshop" at its Yeouido headquarters in Seoul, presided over by Deputy Governor Park Chunghyun, where bank executives were encouraged to prepare executive manuals and improve their fulfillment of the six key management duties.

The six key management duties are: 1) reviewing the adequacy of standards, 2) reviewing the effective implementation and operation of standards, 3) checking employee compliance, 4) correcting and improving violations or deficiencies, 5) supporting education and training, and 6) establishing a reporting system to the CEO.

An FSS official emphasized, "This is an additional inspection to check whether the improvements requested from the financial sector have been properly implemented. It is a completely different process from an examination."

The financial sector believes that the topics of the on-site inspections in the second half of the year will be similar to those covered in previous workshops and seminars, and is preparing accordingly. However, since holding companies are now included in the inspection scope, the sector remains alert.

In particular, Shinhan Financial Group, which underwent a regular inspection until last month, is reportedly focusing its staff on post-inspection procedures (legal review, additional fact-checking, and extended inspection periods), leaving it relatively short-handed.

An official from one of the four major banks stated, "The FSS pointed out during on-site inspections that banks and financial holding companies have been overly focused on 'checking employee compliance' among the six key duties. We are now focusing on developing IT systems and preparing executive manuals to effectively implement the remaining five items." The official added, "Regarding the CEO's overall management duty, we have not yet received specific guidance from the FSS. During next month's FSS on-site inspection, we plan to submit details of what we have implemented in the first half of the year and use the feedback to make improvements."

The duration of the on-site inspections can vary widely, from as short as two days to several weeks. Typically, two to three people are assigned per team. For major issues, staff from the Financial Institution Inspection Departments 1, 2, and 3 participate together. These three departments have a total of 19 teams (Inspection Teams 1-4 in Departments 1 and 2, and Inspection Teams 1-2 in Department 3), with each team consisting of five to six members.

Unless a major financial incident occurs before the second half on-site inspections, the process is expected to be limited to submitting materials and undergoing the inspection. Currently, the FSS is not considering delivering strong messages such as disciplinary action for violations.