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Newsletter | December 2014, Issue 4
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BANKING
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Plans for Strengthening Internal Controls in Financial Institutions by Enhancing Compliance Monitoring
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On August 28, 2014, the Financial Services Commission (“FSC”) announced key features of a proposed regulatory reform to enhance financial companies’ compliance and internal control mechanisms. The proposal comes in the wake of a series of incidents that the FSC views as having seriously undermined the public’s confidence in financial institutions. The FSC expressed its desire that the new rules will not merely bring about cosmetic change but also fundamentally improve internal control and establish a robust compliance culture at these institutions.
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Key features of the new regime (which will involve amendments to relevant laws, regulations and model rules) include a unified and strengthened internal control tower for compliance monitoring. The new rules will initially apply to the banking sector, with other sectors to be added in accordance with industry characteristics.
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Raise Legal Status of Compliance Officer and Confer Right to Demand Cessation of Illegal Activities (Relevant Laws to be Amended)
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A compliance officer will be required to be appointed as an executive officer (with a term of office of two years or more) so that he/she can effectively serve as an internal control tower. The compliance officer will also have the right to participate in all office meetings and to demand cessation of unlawful activities that he/she becomes aware of. A standing “compliance department” will be required to provide support services for the compliance officer.
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Increase “Optimal” Number of Compliance Personnel and Enhance Compliance Officer’s Oversight Authority (Relevant Supervisory Regulations to be Amended)
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The Financial Supervisory Service ("FSS") will encourage companies to devote a certain percentage of their personnel solely to compliance functions. If necessary, the FSS will encourage banks to transfer certain internal investigation personnel within their audit department to the compliance department. Compliance officers will also be given the responsibility of conducting HR evaluations of branch level compliance managers.
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Strengthen Independence vis-à-vis Statutory Audit Committee and Prohibit Concurrent Office Holding (Relevant Laws to be Amended)
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The FSS will seek to increase the independence of compliance officers by changing the definition of compliance officer under the relevant statute, from “one who reports to” the audit committee regarding internal control matters to “one who may report to” the audit committee on such matters.
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Compliance officers will, in principle, be prohibited from concurrently holding another position, although an exception may be granted in light of the HR needs of the bank, to the extent that the compliance officer’s independence is not compromised.
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Make Disqualifying Factors More Reasonable (Relevant Laws to be Amended)
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Under the current laws and regulations, a person may be disqualified from serving as a compliance officer if that person’s conduct may lead to a warning notice (which is a relatively minor penalty). To alleviate the pressure that this rule may put on the compliance officer, the new rules will allow the person to be disqualified only if he or she engaged in a conduct that would warrant a salary reduction.
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