Commercial Banks Divide Internal Control Responsibilities Among 20-30 Key Executives

Financial Services Commission Announces 'Improvement Plan for Internal Control Systems in the Financial Sector'
Financial Company CEOs Must Create 'Accountability Structure Charts'

20-30 Bank Executives Targeted, Accountability Distributed by Position
Internal Control Responsibility by Business Area

FSC to Impose Disciplinary Actions for Violations

Last year’s 70 billion KRW embezzlement case at Woori Bank and the 2019 incomplete sales scandal of private equity funds by banks. To prevent such internal incidents and accidents in the financial sector, financial holding companies and commercial banks will now be required to create a 'Responsibility Structure Chart.' The key is to predefine the internal control responsibility areas for each bank executive. Even when executives delegate actual work authority to subordinates, the responsibility for controlling and managing the delegated tasks remains with the delegator.

On the 22nd, the Financial Services Commission announced the 'Improvement Plan for Internal Control Systems in the Financial Sector,' which includes these measures. The FSC explained, "The principle is that authority can be delegated, but responsibility cannot," and emphasized that "each executive must have a sense of responsibility for internal control and manage and supervise the work activities of their subordinates."

It is important to allocate responsibilities to executives without overlap

A Responsibility Structure Chart is a document that records the allocation of responsibilities by position for executives of financial companies. It targets executives under the Governance Act, including positions such as CEO (Chief Executive Officer), CRO (Chief Risk Officer), and CCO (Chief Customer Officer). For large banks, responsibilities will be assigned to about 20 to 30 executives.

Lee Hyung-joo, Director of the Financial Policy Bureau at the FSC, said, "It is most important to allocate all major responsibilities within the company to the applicable executives without overlap or gaps," and added, "Each person’s area of responsibility must be clearly defined."

The chairman of the board is also included as an executive with responsibility areas defined under 'monitoring duties' and listed in the Responsibility Structure Chart. However, considering the limited information access of outside directors, outside directors other than the chairman will be excluded from the scope of application.

The areas of responsibility to be indicated in the Responsibility Structure Chart will be divided into 'management, risk management, and business divisions.' Within this framework, compliance with laws, sound management, and consumer protection will be addressed.

With the introduction of the Responsibility Structure Chart, the responsibilities of the executives become clearer, making qualifications such as expertise, work experience, integrity, and reliability more important for financial companies. Accordingly, financial companies must verify qualifications not only when appointing new executives but also when existing executives’ positions change according to the Responsibility Structure Chart.

Director Lee stated, "The appropriateness of executive qualifications will be judged by the banks themselves," but added, "If an executive is appointed despite disqualifications, the bank will be held responsible for internal control."

The CEO is responsible for organizational and repetitive problems

The Responsibility Structure Chart is created by the CEO. The CEO is accountable if the chart is inadequately prepared, such as overlapping, gaps, or omissions in responsibilities, or if the actual exercise of authority does not match the executives listed in the chart. The chart is finalized after deliberation and resolution by the board of directors.

Director Lee said, "The completed Responsibility Structure Chart must be submitted to the financial authorities when it is first created, when the executive in charge changes due to personnel changes, or when responsibilities are newly established or abolished due to changes in business operations," and added, "The authorities can request corrections if necessary."

With the introduction of the Responsibility Structure Chart, the CEO will only be responsible for the specified duties. Director Lee explained, "The financial authorities also believe it is not appropriate for excessive responsibility to fall on the CEO," but added, "However, if widespread organizational and long-term repetitive problems occur within the company, the CEO will be held accountable for systemic failures."

The role of the board of directors will also be established. To faithfully perform internal control duties, an 'Internal Control Committee' must be formed as a subcommittee within the board. Its role is to inspect internal control management tasks and demand improvements for any deficiencies.

If not complied with, financial authorities will sanction the relevant executives

If internal control management measures are not implemented or are insufficiently executed, violating management obligations, the financial authorities will impose personal sanctions on the responsible executives. For registered executives, sanctions include dismissal, suspension, pay reduction, reprimand, or warning. For non-registered executives, sanctions include dismissal requests, suspension of duties, disciplinary warnings, cautionary warnings, or warnings.

Director Lee said, "Even if a financial accident occurs, if 'due diligence' is exercised in implementing internal control management measures, responsibility can be mitigated," and explained, "'Due diligence' is judged based on whether management measures were taken to a degree that was objectively predictable in advance." This considers the level of budget, personnel, and time invested, regular audits of internal control, and external evaluations.

The financial authorities will predefine and disclose situations where executives are held responsible for internal control. In other words, they will establish criteria for deciding whether to address violations of internal control management obligations when incidents occur. Director Lee said, "Factors such as whether the executive neglected, encouraged, or instructed illegal acts, past similar incidents, the scale of damage, and the impact on financial markets will be considered."

For internal control failures below a certain level, internal investigations and disciplinary actions are sufficient.

Governance Act amendment and implementation starting with banks and financial holding companies one year later

The timing for introducing the Responsibility Structure Chart has not yet been decided. Director Lee said, "After holding public hearings and gathering industry opinions, the first step is to promote legislation to amend the Governance Act for financial companies," and added, "Even after the bill passes, there will be a one-year preparation period, and banks and financial holding companies will be the first to implement it."

One year after the law is promulgated, it will apply to banks and financial holding companies; one year and six months after promulgation, it will apply to large financial investment companies, comprehensive financial investment companies, and large insurance companies; and within five years, it will apply to small and medium-sized financial companies.

Meanwhile, on the morning of the same day, FSC Chairman Kim Joo-hyun and Financial Supervisory Service Governor Lee Bok-hyun held a meeting with heads of financial associations to discuss the 'Improvement Plan for Internal Control Systems in the Financial Sector.'

Chairman Kim said at the meeting, "Each financial company will establish an internal control system suited to its own characteristics and changes in management conditions, while clearly defining the responsibilities of each executive related to internal control to enhance accountability."

Governor Lee stated, "We will discover and disseminate best practices for preparing Responsibility Structure Charts and fulfilling management obligations," and added, "We will also increase the predictability of inspections and sanctions."

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