"DLF Must Not Recur"... Kim Jung-tae, Chairman of Hana Financial Group, Strengthens Internal Controls Within Group Companies

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[Asia Economy Reporters Haeyoung Kwon, Minyoung Kim] Kim Jung-tae, Chairman of Hana Financial Group, is significantly strengthening the internal control functions across all group companies to prevent a recurrence of the second overseas interest rate-linked derivative-linked fund (DLF) incident. As financial investment products sold by major affiliates such as banks and securities firms have suffered consecutive losses, the plan is to enhance the roles of the board of directors, including the CEO, to ensure that the group's risk management and internal control functions operate effectively.

According to the financial sector on the 28th, Hana Financial Group will expand the currently operating internal control committee to a group-level committee and establish a new reporting system to the board of directors.

Currently, the internal control committee at the holding company includes the CEO, Chief Risk Officer (CRO), and compliance officer. However, going forward, it will be expanded to include key executives such as compliance officers from subsidiaries, and the agenda discussed at the internal control committee will be reported to the holding company’s board of directors.

A financial sector official said, "The internal control committee will review issues related to internal control problems of major group companies and regularly report to the board of directors. By having the board directly oversee internal control issues, it is expected that stronger internal control and risk management at the group company level will be achieved."

Additionally, Hana Financial plans to standardize and specify internal control standards at the group level not only for the holding company but for all affiliates.

Chairman Kim’s move to build strong internal controls stems from the judgment that the DLF incident must not recur. Investors suffered significant losses in this incident, and Hana Financial also bore a reputation risk that is difficult to recover from. Although this may be a burden for financial companies, the plan is to enhance the roles of the board and management regarding internal control to improve the organization’s internal control system and capabilities.

Earlier, Woori Financial Group also newly established an 'Internal Control Management Committee' as a subcommittee within the board of directors to oversee internal control and risk management functions across all affiliates. As financial investment product loss incidents have continued, the trend is for holding company boards to take responsibility and oversee internal controls across all affiliates through internal control matrix organizations.

There are also calls for regulatory authorities to actively encourage other financial holding companies such as Shinhan Financial Group and KB Financial Group to establish internal control control tower models involving board participation. While major financial groups are strengthening matrix functions to enhance collaboration among key affiliates at the group level during business promotion, evaluations suggest that group-level management and supervision of internal control are not being properly conducted.

Overseas regulators also emphasize the role of the board in internal control. In the U.S., Wells Fargo was fined heavily after a financial authority investigation for opening fake accounts in large numbers without customer consent from 2011 to 2016, and the board chair was replaced to barely manage the situation.

Another financial sector official said, "Regulators should conduct a comprehensive inspection of the internal control organization operations of major financial companies and encourage the establishment of systems that can function effectively. Although some concerns arise that these might be 'redundant' organizations, financial company boards must actively take the lead in changing organizational culture and strengthening internal controls."

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