Financial Supervisory Service Focuses on Risk Management and Incomplete Sales Inspections at Securities Firms... Also Checks Related Agencies and Credit Rating Agencies

[Asia Economy Reporter Ji-hwan Park] The Financial Supervisory Service (FSS) plans to conduct a focused inspection of securities firms' risk management practices this year, with an emphasis on examining incomplete sales practices during the manufacturing and sales processes of high-risk financial investment products. Inspections will also be carried out on securities-related institutions and credit rating agencies, which have been criticized for lacking external oversight functions. Additionally, the FSS will conduct comprehensive examinations of three securities firms and one asset management company that show weaknesses in consumer protection and internal controls.

On the 25th, the FSS announced the selection and advance notice of the "2021 Key Inspection Items for Financial Investment Companies." The key inspection items include △ focused inspections on areas where damages have occurred △ checks on potential risks △ inspections of hidden vulnerable areas △ and inspections of infrastructure institutions.

First, the FSS will focus on checking whether securities firms have engaged in incomplete sales related to suspended redemption private equity funds and derivative-linked securities (DLS). The entire process from initial design to post-management of high-risk investment products’ manufacturing, sales, and management will be reviewed. Alongside this, the FSS will examine whether public offering regulations have been evaded for DLS with identical underlying assets and structures, and plans to continue the full-scale inspection of professional private fund managers that has been ongoing since last year.

An FSS official stated, "Due to the low-interest rate environment and expanded market liquidity, demand for high-yield financial investment products is expected to continue. It is necessary to focus inspections on cases where high-risk financial investment products are indiscriminately sold or investors suffer losses due to improper management of customer assets."

The FSS also intends to encourage proactive responses to the spread of financial market instability. In the securities industry, the importance of risk management is highlighted due to activities such as issuance of promissory notes by comprehensive financial investment business operators and corporate credit extension. Accordingly, the FSS will inspect the implementation of liquidity stress tests reflecting extreme scenarios and the establishment of emergency foreign currency procurement plans. The actual conditions of shadow banking in the capital market through structured securities such as SPCs and DLS will also be inspected. For asset management companies, the appropriateness of MMF stress tests, the status of risk management organizations, and the soundness of leveraged land trusts sensitive to real estate market fluctuations will be examined.

Regarding overseas real estate and alternative investment funds, frequent financial accidents have occurred due to concentrated capital flows, so the FSS plans to prevent investor damage in advance through proactive inspections. For securities firms, inspections will cover whether unfair financial benefits were provided during resale processes, the appropriateness of overseas alternative investment evaluations, and the actual conditions of resale and post-management of overseas alternative investments. For asset management companies, the FSS will focus on the adequacy of investor explanations for fund-of-funds, improper payment of management fees, and unfair advisory and consignment contracts related to overseas real estate funds.

Inspections will also be conducted on capital market infrastructure institutions such as securities-related organizations and credit rating agencies. This is based on the judgment that these institutions may have entrenched improper business practices due to monopolistic market positions and lack of external monitoring and checks.

Furthermore, the FSS will select three securities firms and one asset management company with insufficient levels of financial consumer protection and financial soundness for comprehensive examinations.

An FSS official said, "We expect this to serve as an opportunity for financial investment companies to enhance their risk management capabilities in vulnerable areas and improve investor protection levels, thereby restoring market trust that has declined due to recent large-scale private equity fund redemption suspension incidents."

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