"Authorities Focus on Improvement, Not Sanctions"...Financial Industry Develops Internal Control System Measures

"Strengthening the Role of Internal Controls in Financial Companies' Boards of Directors"

Civic groups including the Citizens' Coalition for Economic Justice and representatives of the Optimus Fund victims' association held a press conference on the 5th in front of the Financial Supervisory Service in Yeouido, Yeongdeungpo-gu, Seoul, urging the Financial Supervisory Service to make a dispute resolution decision to cancel the Optimus contracts and refund the full principal amount. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Park Sun-mi] A 'Plan for the Development of Internal Control Systems' has been prepared, which includes the content that in the event of a financial accident, financial companies will directly take disciplinary actions against related personnel and prepare improvement plans, so financial authorities should only suggest improvement directions instead of direct intervention.

On the 6th, the heads of six financial associations including the Korea Federation of Banks, Korea Financial Investment Association, Korea Life Insurance Association, Korea Non-Life Insurance Association, Korea Credit Finance Association, and Korea Federation of Savings Banks jointly prepared the 'Plan for the Development of Internal Control Systems in the Financial Industry' and announced that they will promptly implement matters that financial companies can independently pursue.

According to the development plan, financial companies will strengthen the role of the board of directors in internal control and improve management and business environments to comply with internal control. Through regular and ad-hoc evaluations of internal control, if defects are found, the board of directors will take the lead in preparing disciplinary measures for executives and employees and improvement plans for internal control. They will enhance transparency by disclosing activities related to the board's internal control through governance annual reports, and to prevent unclear responsibility due to ambiguous or overlapping roles among executives and employees, they plan to clearly define the role-sharing related to internal control among the CEO, compliance officer, and financial consumer affairs officer.

Additionally, to ensure that a performance-oriented sales culture does not weaken internal control, customer satisfaction indicators such as customer yield will be reflected in performance evaluation indicators (KPIs), and sales performance of specific products will be excluded from KPIs, improving the business environment considering the characteristics of each financial sector.

For financial authorities, considering that internal control is a form of self-regulation by financial companies, they proposed to supervise based on principles such as suggesting improvement directions rather than the current sanction-centered supervision method, and to create a regulatory environment that incentivizes internal control. They requested that instead of direct intervention in disciplinary actions by financial companies, financial authorities periodically evaluate the operation status of internal control in financial companies and suggest improvement directions for vulnerabilities found through this process.

They stated that any weakening of execution power that may occur under principle-based supervision can be supplemented by strengthening the self-regulatory functions of each financial association. They also proposed that for areas where direct intervention by financial authorities is necessary to protect financial consumers and ensure sound management of financial companies, explicit legal grounds should be established to ensure predictability and exclude arbitrary law enforcement. Furthermore, they suggested providing incentives such as reducing disciplinary actions against institutions and employees, lowering fines and penalties, and relaxing inspection cycles for financial companies with excellent internal control, thereby expanding incentives for financial companies to strengthen internal control on their own.

Moreover, they recommended to the National Assembly that regarding the currently discussed amendment to the Financial Company Governance Act (legalization of internal control management obligations), the content of internal control management obligations and grounds for sanctions should be clearly defined to prevent misuse as grounds for result responsibility due to insufficient internal control. They requested deletion of subjective criteria such as 'effectiveness' and 'faithfulness' included in the internal control management obligations of the amendment to prevent their misuse as de facto result responsibility, and to limit grounds for sanctions to cases where violations of internal control management obligations cause 'mass harm' or 'disruption of market order,' as in the government proposal.

A representative of the Korea Federation of Banks explained, "The heads of the six financial associations, including Kim Kwang-soo, chairman of the Korea Federation of Banks, emphasized that since the internal control system of financial companies internalizes external regulations, it is necessary to guarantee autonomy so that each company can establish an optimized system centered on the board of directors rather than regulating uniformly."

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