The Financial Services Commission held a meeting with the Financial Supervisory Service and financial industry groups on June 22 and announced a plan to improve financial companies’ internal control system. As a key policy agenda of this administration, the proposed measures have been prepared after having discussions and gathering opinions from experts and financial companies since October last year.
First, financial companies will be required to clearly designate internal control responsibility of each executive officer. This is not a uniform regulatory requirement imposed by the financial authorities. By having financial companies to set up and operate an internal control system on their own according to their own needs and circumstances and by having the responsibility of each executive officer clearly assigned, the proposed measures are aimed at raising awareness and responsibility of executive officers about their internal control system.
More specifically, a CEO of a financial company will need to prepare a responsibilities map showing how internal control responsibilities are shared and divided among executive officers. The responsibilities map will specify the executive members who bear the ultimate responsibility for each work area, laying groundworks to prevent them from delegating internal control duties to subordinates.
Executive officers designated on the responsibilities map will be required to comply with the internal control management duty by regularly checking the appropriateness of internal control standards, whether their employees are complying with the standards and whether their internal control standards are operating properly. As the top overseer of internal control, the CEO of a financial company will be responsible for establishing a company-wide internal control system and supervising each executive officer’s internal control activities. As of now, CEOs of financial companies are only required to establish internal control standards. However, as they will be additionally required to manage the company-wide internal control activities, it is expected that financial companies’ internal control measures will operate more effectively.
Meanwhile, for executive officers who have been practicing due diligence regarding their internal control duties, a mitigation of responsibility or an exemption from sanction may be granted even if a financial accident takes place, as a way to ensure protections against unforeseeable or uncontrollable accidents. In other words, the main purpose of the reform measures being rolled out is to induce executive officers to more faithfully carry out their internal control duties, instead of focusing on sanctions against them. The responsibilities map framework is a regulatory measure successfully operated in major countries such as the UK and Singapore. In this regard, the proposed reform measure will help make Korea’s internal control system more consistent with international standards while laying foundations for further development of Korea’s financial industry.
The board’s oversight role over internal control matters will also be made clearer as the board’s oversight duties have been specified under the Commercial Act. With the board’s oversight role strengthened, it is expected that the principle of checks and balances in the governance structure of financial companies will be restored.
As the reform introduces a new internal control framework, financial authorities along with the industry groups plan to prepare best practice guidelines showing appropriate internal control activities to help minimize financial companies with initial setup costs.
The FSC will gather financial companies’ opinions to work on details of the proposed reform measures and seek revision of the Act on Corporate Governance of Financial Companies thereafter.
* Please refer to the attached file for details.