FSS Urges Trust Companies to Strengthen Internal Controls and Consumer Protection Ahead of Duty Structure Implementation

Meeting of Real Estate Trust Company CEOs Held

The Financial Supervisory Service has urged trust companies to establish effective internal control systems ahead of the introduction of the duty structure, which will take effect for trust companies in July. The agency called for eradicating misconduct such as the pursuit of private interests, adhering to the best practice guidelines for business conduct, and strengthening consumer protection by re-examining the role of trust companies from the consumer's perspective.

On March 19, the Financial Supervisory Service announced that it had held a meeting at the Korea Financial Investment Association in Yeouido, presided over by Hwang Sunoh, Deputy Governor for Capital Markets and Accounting, with the CEOs of 14 real estate trust companies in attendance. Topics discussed included the introduction of the duty structure for trust companies, fostering a culture of consumer protection, and proactive risk management.

Deputy Governor Hwang first diagnosed that the profitability and soundness of trust companies have deteriorated due to issues such as the insolvency of project financing sites and losses in lawsuits related to completion-guaranteed projects. He also pointed out that incidents of employees pursuing private interests, stemming from inadequate internal controls, have undermined trust in these companies.

He stated, "Starting in July this year, the duty structure will also be introduced for trust companies, which will significantly strengthen the internal control responsibilities of executives. I urge CEOs to take direct responsibility in establishing effective internal control systems so that a culture of compliance management can take root within organizations."

He further emphasized, "Misconduct such as employees of trust companies pursuing private interests has been a chronic issue in the industry that requires immediate improvement." He requested strict implementation of the 'Best Practice Guidelines for Real Estate Trust Company Business Conduct,' which has been in effect since January this year, to ensure a sound business order. The guidelines focus on: ▲ Strengthening the review process for trust project orders ▲ Enhancing transparency in the selection of service providers and fund execution ▲ Raising compliance awareness among employees and strengthening internal controls.

He also stressed the need to strengthen consumer protection in line with government policy. Deputy Governor Hwang said, "The real estate business involves a multitude of stakeholders, including creditor groups, construction companies, and buyers, making the role of trust companies extremely important. I urge you to move away from a high-handed attitude, listen to the difficulties of various stakeholders, actively seek solutions, and take the lead in consumer protection."

Additionally, he requested that trust companies ensure that buyers are not harmed by construction delays through strict management of construction schedules. He also emphasized the need for trust companies to review their overall business practices from the perspective of consumers, such as preventing cases where their role in managing funds is misconstrued as credit enhancement when they are only acting as an agent.

Furthermore, in light of recent losses in lawsuits over projects where trust companies missed completion-guarantee deadlines, he requested that companies re-examine their liquidity contingency plans and, if necessary, promptly carry out capital increases. He stated, "For projects with completion-guarantee obligations where the construction period has expired, please proactively set aside provisions regardless of whether lawsuits have been filed."

He also pointed out that the financial risks facing trust companies are due to their focus on expanding the scale of land trusts without adequately considering capital capacity and risk factors. He urged them to responsibly and stably conduct business, such as only taking on new projects within the limits of their own capital in line with the introduction of land trust soundness regulations.

Finally, Deputy Governor Hwang remarked, "Trust companies play a public role by providing living spaces to citizens based on their expertise in real estate business. I hope you will work to revitalize new housing supply by expediting urban renewal projects in which you are involved. The Financial Supervisory Service will also actively support necessary regulatory improvements, such as changes to the Net Capital Ratio (NCR), related to housing supply."

The meeting attendees also expressed their intention to faithfully fulfill the core roles of trust companies, such as restoring market trust by improving internal control systems and strengthening the protection of consumer rights, which had previously been somewhat neglected, as well as ensuring stable real estate supply. They added that, in response to ongoing market uncertainties both domestically and internationally, they would focus their capabilities on risk management, including complying with land trust limit regulations and securing liquidity.

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