Lee Bok-hyun Urges Securities CEOs to "Directly Oversee Risk Management"

April 24 Financial Services Commission-Financial Supervisory Service-Securities Firms Meeting

Financial Supervisory Service Governor Lee Bok-hyun met with CEOs of major domestic securities firms on the 24th and urged them to personally oversee risk management related to real estate project financing (PF). The photo shows Governor Lee Bok-hyun holding a press briefing on the 4th. Photo by Kang Jin-hyung aymsdream@

Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), met with CEOs of major domestic securities firms on the 24th and urged them to personally oversee risk management related to real estate project financing (PF). He issued a stern warning, stating that for companies repeatedly experiencing liquidity crises, "there is no choice but to question their sustainability."

"Real Estate PF Provisions Must Be Adequately Accumulated by December Year-End Closing"

At the 'Financial Services Commission-Financial Supervisory Service-Securities Industry Meeting' held at the Korea Financial Investment Association in Yeouido, Seoul, Governor Lee made these remarks. This meeting was the first official gathering between financial authorities and securities industry CEOs this year, focusing on devising measures to restore consumer trust that has been eroded in the financial investment sector.

Governor Lee said, "I ask that you conduct thorough risk analyses of your PF projects and swiftly and decisively dispose of non-performing projects," adding, "I expect you to accumulate sufficient provisions at the December year-end closing to proactively prepare for potential future crises." He also warned, "We will hold accountable those who negligently recognize expected PF losses in pursuit of short-term profit goals."

Concerns are emerging in the market, particularly around small and medium-sized securities firms with large contingent liabilities. Critics point out that these firms have not accumulated sufficient provisions relative to their business structures and risks. This includes Daol Investment & Securities, SK Securities, Eugene Investment & Securities, and Hi Investment & Securities. Notably, the three major credit rating agencies?NICE Investors Service and Korea Ratings?recently placed Daol Investment & Securities under credit rating monitoring. Korea Investors Service also downgraded the company's credit rating outlook from 'stable' to 'negative' at the end of last year. In addition, large securities firms with significant real estate risk exposure are also accumulating provisions related to real estate PF projects. As of the end of June last year, the domestic and overseas real estate finance exposure of 25 domestic securities firms was estimated at 47.6 trillion KRW.

He also mentioned the need for a fundamental 'structural reform' to change the financial investment industry's tendency to prioritize short-term profit generation over risk management. The FSS announced last July that it would improve the performance-based compensation system for securities firms' real estate PF to be linked with long-term performance.

Governor Lee said, "Please revise the performance-based compensation system to be linked with the long-term performance of financial companies," and added, "I ask CEOs to personally ensure that basic risk management principles are not forgotten, such as avoiding concentration in real estate PF and excessive reliance on short-term funding." He emphasized, "I want to make it clear here that if failures in risk management by some companies cause shocks to the financial market, we will hold the relevant securities firms and their management strictly and appropriately accountable."

He also issued a stern warning, stating, "Please keep in mind that for financial companies where liquidity shortages have repeatedly occurred during crises, there is no choice but to question the sustainability of the company."

CEO Holds Final Responsibility for Internal Controls... Calls for Organizational Expansion

Governor Lee also stressed management's responsibility for internal control failures. Recent FSS inspections uncovered various forms of unsound business practices and acts of self-interest in numerous financial investment companies. One case involved using non-public development information of a real estate PF project to invest in convertible bonds (CB) related to the developer through a related corporation, resulting in an improper gain of about 50 billion KRW. Another case involved using undisclosed information obtained during the PF arrangement process to establish an investment association with acquaintances, gaining an improper profit of 2 billion KRW.

Governor Lee said, "Such situations should not be underestimated as industry practices or mere deviations by some employees," emphasizing, "They should be recognized as structural problems stemming from the pervasive 'performance-at-all-costs' culture throughout the financial investment industry." He added, "As the CEO, who holds ultimate responsibility for internal controls, please share this awareness and expand human and material resources so that compliance, risk management, and audit organizations can operate effectively." He also urged, "Please break away from leniency toward employees involved in illegal acts and respond firmly with disciplinary actions and claims for damages."

He further stressed, "The FSS will take strong measures against such illegal acts, including imposing not only personnel disadvantages but also monetary sanctions exceeding the profits gained and imposing business restrictions."

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