Banks Tighten Internal Controls on Sales of General Financial Investment Products (Comprehensive)

Banks Launch TF Under FSC Order
Regulations Applied to Virtually All Investment Products
Standard Expected by Mid-Year
Banks Concerned About 'Weakened Sales Power'

[Asia Economy Reporters Kim Hyo-jin and Kim Min-young] The Financial Supervisory Service (FSS) and the banking sector are creating sales guidelines that strengthen internal controls even for general financial investment products with relatively low risk. This measure aims to prevent incomplete sales and avoid a recurrence of the recent overseas interest rate-linked derivative-linked fund (DLF) incident.

With sales restrictions already applied to high-risk investment products and the soon-to-be-established internal control measures, virtually all investment products will be subject to additional direct or indirect regulations on sales. Banks are concerned about an overall contraction in business activities amid worsening management conditions due to interest rate declines, economic slowdown, and tightened loan regulations.

According to the financial sector on the 4th, nationwide commercial banks have recently formed a task force (TF) at the request of the FSS to prepare specific guidelines for internal control standards for pre- and post-sales management of general investment products.

They are refining applicable measures through consultations and advice within the banking sector based on the reference plan provided by the FSS.

An FSS official said, "The goal is to establish effective internal control standards to prevent incidents like the DLF case from recurring," adding, "For now, banks are autonomously creating guidelines considering their own specific circumstances."

The FSS plans to finalize the standard guidelines by the first half of this year. Based on this, common guidelines for the entire banking sector will be established, and detailed instructions will be applied by each bank.

The newly prepared standard guidelines are expected to include measures such as ▲strengthening product review functions through external experts ▲introducing verification systems by expanding dedicated customer channels ▲setting sales limits by customer and asset management company ▲establishing step-by-step risk management systems after sales ▲providing additional product guidance and risk explanations post-sale ▲setting up risk occurrence alert systems ▲establishing consumer-centered compensation procedures, thereby enhancing consumer protection functions across all pre- and post-sales stages.

The performance evaluation system (KPI) will also be restructured to avoid excessive sales and focus on consumer protection and management capabilities.

Earlier, in November last year, financial authorities banned banks from selling high-difficulty (high-risk) private equity funds with a risk of losing more than 20% of the principal and raised the minimum investment amount for private equity funds to 300 million KRW. The intention was to encourage sales mainly of investment products with relatively low principal loss risk. Additionally, the criteria for elderly investors subject to mandatory recording and cooling-off periods were lowered from age 70 to 65 and above.

In this regard, Na Jae-cheol, chairman of the Korea Financial Investment Association, stated at a press briefing last month, "Restoring trust in the financial market is of utmost importance," and announced plans to "establish sales conduct standards for high-risk investment products." Accordingly, the association plans to create a standard for internal controls related to all procedures including development and sales of high-risk investment products and recommend it to related financial companies.

Once internal control guidelines for the sale of general investment products are established, banks will be subject to new regulations related to the sale of all investment products regardless of risk level. This is pointed out as inevitably leading to weakened sales capabilities.

A banking sector official said, "There is a general atmosphere of willingness to actively participate, and information exchange among banks is taking place," but also admitted, "It is true that there are high concerns about whether the already contracted sales field will shrink further due to various high-intensity government regulations and the aftermath of successive fund loss incidents."

This content was produced with the assistance of AI translation services.