Strengthening and improving the internal control systems of financial institutions has been an important topic within the banking and finance sector over the past several years. In addition, in response to observations that competition within the banking sector was relatively limited, financial regulators have established a taskforce and announced the “Measures to Improve the Management and Operating Practices of Banks and the Banking System.” With these initiatives, the regulatory landscape is changing rapidly, and there is a possibility for competition to increase in the banking sector. In 2024, regulators will likely turn their attention to implementing these regulatory initiatives by amending the relevant laws and regulations and rolling out regulatory guidelines. Other noteworthy topics include (i) how financial institutions will deal with Equity-Linked Securities (“ELS”) products; and (ii) policy discussions following the Government’s push for the “mutual prosperity” approach between banks and customers.

After the financial industry experienced a series of accidents over the past several years that included employee embezzlement and mis-selling of financial investment products, the year 2023 called for the financial sector to revamp its internal control systems. In response, the financial regulators have proposed reforms to the performance-based bonus system under the Act on Corporate Governance of Financial Companies (the “Corporate Governance Act”) and have issued the “Improvement Plan for the Internal Control Systems of Financial Companies.” Amendments to the Corporate Governance Act and regulatory guidance to the foregoing Improvement Plan will likely be introduced in 2024 to further implement these reforms.

Meanwhile, financial regulators have also noted the lack of competition within an oligopolistic banking sector, and have established a taskforce to address this concern. On July 5, 2023, the taskforce team issued the “Measures to Improve the Management and Operating Practices of Banks and the Banking System,” and we expect to see more specific follow-up measures to be introduced in 2024.

Another key issue involves ELS products linked to the Hong Kong Hang Seng China Enterprises Index (the “HSCEI”), with a majority of these ELS products set to mature in the first half of 2024. The noticeable decline in the HSCEI, particularly in contrast to its performance in 2021, has raised alarms for investors who hold HSCEI-linked ELS products, as substantial losses are likely to materialize. As such, disputes involving losses arising from ELS products and the financial institutions’ response to such losses will also be an issue worth keeping an eye on in early 2024.
 

The “Discussions on Measures to Improve the Performance-based Bonus System under the Corporate Governance Act” issued on April 19, 2023 and the “Improvement Plan for the Internal Control Systems of Financial Companies” issued on June 22, 2023 collectively call for fundamental reforms to the internal control systems of banks and other financial companies.

These proposals include various measures, such as (i) requiring registered executives (directors and statutory auditors) of listed financial companies of a certain size to explain remuneration plans at shareholders’ meetings during their term, covering aspects like the design and operation of the company’s remuneration system and standards for calculating the total amount of remuneration; and (ii) requiring the disclosure of total remuneration, performance-based bonuses and specific calculation standards for executives whose total remuneration or total performance-based bonus exceeds a certain amount. These requirements are also reflected in the proposed amendment to the Corporate Governance Act submitted in June 2020. In addition, the Government’s draft amendment to the Corporate Governance Act will likely be revised in 2024 to (iii) require financial companies to establish a “Responsibilities Map” and qualification requirements for executive officers; and (iv) require executive officers to manage internal control.

Moreover, the Financial Supervisory Service (the “FSS”) and banks have jointly set up a taskforce in July 2023, aimed at formulating “best practice” guidelines for corporate governance involving banks and bank holding companies. The taskforce continues to discuss key issues on corporate governance including (i) establishing a support network for outside directors; (ii) improving CEO appointment procedures and management succession procedures; (iii) evaluating the collective suitability of the Board of Directors; (iv) enhancing the performance evaluation system for outside directors; and (v) improving internal control systems (e.g., drafting a Responsibilities Map for senior executive positions, among others). The financial regulators are expected to roll out additional measures in 2024 that will enhance the corporate governance framework in the banking sector.
 

Specific implementation plans to the “Measures to Improve the Management and Operating Practices of Banks and the Banking System” will likely be announced in 2024. In particular, there have been extensive discussions on introducing the bank agency business (i.e., allowing non-bank entities to provide bank-related services) and voluntary disclosure on the management information of banks. The latter, which is scheduled to come into effect in April 2024, will allow banks to publicly disclose their management information status that not only includes executive performance bonuses but also information on employees’ performance-based bonuses, early retirement packages, dividend payouts and policies, the bank’s social responsibility activities and its capital reserves.

Additional topics likely to be on the discussion agenda for 2024 include expanding home mortgage loan refinancing services through an online, one-stop loan refinancing platform, which is already in service. Regarding online deposit product brokerage services, there has been discussion on expanding the scope of such services to include demand deposit products and raising the sales limit for financial institutions (currently capped at 5% of new deposits for banks).
 

With a significant portion of ELS products approaching maturity next year, the financial sector’s response to potential disputes involving ELS products will likely be an important issue in 2024. Banks and financial institutions will need to conduct a thorough review and plan on how to handle the anticipated losses in light of the approaching maturity. Taking such a proactive approach will be critical for financial institutions, given that recent incidents involving the delayed redemption of private investment funds prompted financial institutions to enhance their governance structures.

According to the FSS, the prices of approximately KRW 7 trillion worth of derivative-linked securities have already fallen below the “knock-in” level as of the end of June 2023, all of which are ELS products. Many of those ELS products use the HSCEI as the underlying asset, with approximately 85.6% of them (worth approximately KRW 6 trillion) scheduled to mature in the first half of 2024.

In the event the HSCEI fails to recover above the “knock-in” level before the ELS products mature (in which case investors will lose all or part of their investment), financial companies will likely face issues related to mis-selling, and questions will be raised as to whether their internal control policies were adequate. Therefore, it would be prudent for financial institutions to review whether their sales of such financial investment products complied with the applicable laws, regulations and their internal regulations, and to calculate the estimated loss in advance to properly respond to any issues that may arise in connection with these ELS products.
 

The deteriorating economic conditions have sparked significant interest in promoting “mutual prosperity” between the banking sector and their customers. This approach has gained support not only from the financial regulators but also from politicians and the general public. As this trend gains momentum, regulators are expected to provide further guidance on how to implement this approach. For instance, the mutual prosperity approach could involve (i) offering products designed to lessen financial consumers’ burden of paying interest as a way to return some of the profits that banks have gained due to rising interests; (ii) creating a dedicated fund that offers lower interests; or (iii) legislating “windfall tax.”
 

In 2023, there was a variety of discussions regarding the financial sector on improving corporate governance and management and sales practices. In response, financial institutions have initiated an internal assessment of their internal structures, internal regulations and operational procedures to identify any gaps and areas that need improvement. We expect the discussions that took place in 2023 to further materialize in 2024 through a wide variety of initiatives. Therefore, financial institutions will need to work towards improving their internal structures by reflecting the requirements prescribed in the amended laws and regulations, as well as in the guidance provided by financial regulators. In particular, financial consumer protection and compliance with the applicable laws will become even more important for financial institutions.

[Korean Version]