[1mm Financial Talk] Preparing for Crises... Banks Spending Billions on 'CEO Bulletproofing'

Financial Holding Companies and Banks Busy Ahead of Accountability Structure Introduction from December Next Year
Investing Tens of Billions of Won in Law Firms and Consulting Companies

"These days, large law firms and consulting firms often contact the staff members of the National Assembly's Political Affairs Committee. This is because of the 'Accountability Structure Diagram' included in the internal control-related financial company bill that was passed in the National Assembly ten days ago. They are trying to find out through the National Assembly when the Financial Services Commission will release detailed enforcement ordinances and what the contents will be." (Official from the National Assembly Political Affairs Committee)

By December next year, financial holding companies and banks must submit an 'Accountability Structure Diagram' to the financial authorities that clearly specifies the duties of executives and holds them responsible for internal management. According to the financial industry on the 19th, around the time the "Financial Company Governance Act Amendment" passed the National Assembly plenary session on the 8th, financial holding companies and banks have been investing tens of billions of won to create the accountability structure diagrams.

An official from a commercial bank said, "Financial holding companies and banks are entrusting law firms and consulting firms with the preparation of the accountability structure diagrams, and the cost is known to be around 2 to 3 billion KRW per holding company or bank." It is reported that large consulting firms and law firms such as Deloitte Anjin, Samjong KPMG, Samil PwC, Bae, Kim & Lee LLC, and Yulchon are currently handling the work.

CEO Responsibility, the Most Sensitive Issue

The reason the authorities require holding companies and banks to create accountability structure diagrams is to identify who is responsible when large-scale embezzlement or financial accidents occur. The accountability structure diagram targets about 20 to 30 key executives such as the CEO (Chief Executive Officer), CRO (Chief Risk Officer), and CCO (Chief Customer Officer). It is prepared in the areas of 'management, risk management, and sales departments.' Executives must continuously monitor to ensure that internal controls over their respective duties are properly implemented.

The key issue is when the CEO must take direct responsibility. In June, when the Financial Services Commission announced the "Improvement Plan for Internal Control Systems in the Financial Sector," it explained, "If widespread problems occur within the company in an organized and long-term repetitive manner, the CEO will be held responsible for systemic failures." This is the point that financial companies are most concerned about when creating the accountability structure diagrams.

Due to the nature of financial holding companies as 'companies without owners,' chairpersons have enjoyed autocratic positions. In 2019, the private equity fund scandal and the discovery of incomplete sales revealed internal control issues in financial companies. At that time, each holding company desperately tried to avoid having the chairperson take responsibility. They even went as far as filing administrative lawsuits when disciplined by financial authorities. In December last year, the former chairman of Woori Financial Group won a lawsuit to cancel a severe disciplinary action by the financial authorities. The chairman of Hana Financial Group also filed a cancellation lawsuit, and the second trial is currently underway. Recently, the CEOs of KB Securities and NH Investment & Securities have also filed cancellation lawsuits.

Holdings and Banks from December Next Year, Financial Investment and Insurance from June the Year After Next

A financial sector official said, "The accountability structure diagram itself started with the intention of closing loopholes for CEOs to escape responsibility," adding, "Therefore, financial companies consider specifying the roles of the chairman and bank president the most sensitive and important task." He continued, "When an accident occurs, whether the CEO is sanctioned or whether the blame can be shifted to executives depends on a single word written in the accountability structure diagram," and "That is why financial companies are not sparing tens of billions of won in creating these diagrams."

Kim Ju-hyun, Chairman of the Financial Services Commission, and Lee Bok-hyun, Governor of the Financial Supervisory Service, are attending the 'Financial Holding Company Chairmen Meeting' held on the 20th at the Bank Federation Hall in Jung-gu, Seoul, exchanging opinions. Photo by Kang Jin-hyung aymsdream@

All financial sectors must submit the accountability structure diagrams, but the application timing differs. Financial holding companies and banks start from December next year. Therefore, even if issues such as incomplete sales or suitability principles arise from the Hong Kong H Index-related ELS incident, they are unrelated to the accountability structure diagram. A Financial Services Commission official stated, "The law is not applied retroactively," and "If sanctions are necessary regarding the ELS incident, they will be based on the law at that time in 2021."

The application timing for financial investment companies (with total assets of 5 trillion KRW and operating assets of 20 trillion KRW or more), comprehensive financial companies, and insurance companies (with total assets of 5 trillion KRW or more) is June 2025. Relatively smaller financial investment and insurance companies, specialized credit finance companies, and savings banks will be subject to the law within five years after its enforcement (June next year).

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