The amended Act on Corporate Governance of Financial Companies (the “Act”), which primarily introduces a responsibilities map (the “Responsibilities Map”) requirement and imposes obligations on officers regarding their managerial responsibility for internal control and risk management obligations (the “Internal Control Obligations”), took effect on July 3, 2024. In lockstep with this development, the financial authorities have released the Commentary on the Amended Corporate Governance Act in relation to the Responsibilities Map (the “Commentary,” see Link to the original publication in Korean) to respond to inquiries that have been collated through ongoing communication with financial sector stakeholders.
The Commentary outlines the financial authorities’ stance on various aspects of the Act, such as the concept of, assignment criteria for, and scope of responsibilities outlined in the Responsibilities Map. It also addresses the implementation of management obligations concerning Internal Control Obligations, sanctions for breaching these obligations, and the operation of the internal control committee within the board of directors. Additionally, it sheds light on key considerations not expressly stated in the Act, providing insight into the financial authorities’ perspectives and interpretations.
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Distinguishing Responsibilities from Regular Duties
The Enforcement Decree of the Act defines “responsibilities” as the responsibilities to execute and fulfill the Internal Control Obligations with respect to compliance with financial regulatory laws by financial companies or their officers and employees. The Commentary clarifies that such responsibilities differ from the regular duties performed by financial companies or their officers and employees while conducting business activities to execute and fulfill the Internal Control Obligations in order to prevent breaches of relevant laws and regulations.
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Officers of Other Companies Having Substantial Influence
The Commentary elaborates on the term “officers of other companies with substantial influence over the responsibilities” to refer to officers who wield de facto influence over these responsibilities (rather than regular duties). Each financial company has the discretion to determine officers having “substantial influence over the responsibilities” by considering factors such as their management status and level of involvement in those responsibilities.
Where a financial holding company engages in business discussions aimed at enhancing business management without impeding the regular execution of its subsidiary’s responsibilities would not meet the criteria for exerting substantial influence. However, if an executive officer of a financial holding company were to give unreasonable directives in response to an officer of a subsidiary raising concerns about Internal Control Obligations during business discussions, the former should be deemed to exert significant influence over the subsidiary’s responsibilities and must be included in the subsidiary’s Responsibilities Map. This explanation also applies to the relationship between the head office/regional head office of financial companies overseas and their domestic branches.
In case officers from other companies exerting de facto influence were to be included in the Responsibilities Map of the financial company, disqualification criteria as stipulated in Article 5 (1) of the Act would not be considered. However, with the incorporation of the qualification criteria in the amended Act, these officers must now be assessed to ensure they possess key attributes such as expertise, professional experience, integrity, and other necessary qualities to effectively fulfill the responsibilities outlined in Article 5 (3) of the Act. The results of this qualification criteria assessment should be reported and disclosed within seven business days following the assignment of responsibilities in the Responsibilities Map.
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Assignment of Responsibilities for Small Financial Institutions: Domestic Branches of Overseas Financial Companies
The representative director (or, in the case of a domestic branch of an overseas financial company, the representative) tasked with preparing the Responsibilities Map and assigning responsibilities must ensure that the Responsibilities Map is devoid of any omissions, overlaps and imbalances. Ensuring balanced allocation is different from assigning an identical number of responsibilities to each individual. Rather, it involves delegating responsibilities in a strategic manner that enables the relevant officers to faithfully fulfill their Internal Control Obligations according to their assigned roles.
When assigning duties within small financial institutions that have a limited number of officers, such as most domestic branches of overseas financial companies, it is particularly critical to carefully assess the organization's structure and the nature of the duties. Distributing diverse responsibilities among officers who are required to undertake various tasks based on the organization’s needs should not be mistakenly viewed as excessively concentrating responsibilities onto one individual.
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Appointment of Officers and Board Resolution on Responsibilities Map
According to the Act, the Responsibilities Map must be prepared through a board of directors’ resolution. If there is a discrepancy between the timing of resolutions on appointing or changing an officer and modifying the Responsibilities Map, certain responsibilities may inadvertently be omitted. To avoid this outcome, management should identify in advance those officers and employees who will assume these responsibilities in the absence of the officer currently in charge of the responsibilities and include them in the Responsibilities Map prior to the board resolution. In sum, when developing the Responsibilities Map, financial institutions should designate individuals in advance who will step into the role of an absent officer and obtain approval from the board of directors for those designations.
Furthermore, in the event of (i) change of the officer to whom responsibilities are assigned, (ii) change of an officer’s role outlined in the Responsibilities Map, or (iii) change or addition of an officer’s responsibilities, the representative director (or the representative) must update the Responsibilities Map through a board resolution and submit it to the financial regulatory bodies. Moreover, if several officers are appointed or dismissed on different dates, the Responsibilities Map should clearly outline the timing for transferring responsibilities from the outgoing officer to the incoming officer to ensure that no responsibilities are excluded. In such instance, the board of directors can resolve to amend the Responsibilities Map without the need for a separate meeting solely to the change in the Responsibilities Map.
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Relationship between Foreign Finance-Related Laws and Assignment of Responsibilities
Regarding “financial regulatory laws,” a crucial element in identifying the responsibilities, along with the Act, the Commercial Act, the Criminal Act, and other specific finance-related laws, the existing Act characterizes this term as encompassing specific financial regulatory laws in Korea, in addition to “financial regulatory laws of foreign countries equivalent thereto.” Naturally, a concern has arisen about the necessity of reviewing foreign finance-related laws each time responsibilities are identified for inclusion in the Responsibilities Map.
On this topic, the Commentary discusses both cases involving an overseas branch of a domestic financial company and a domestic branch of an overseas financial company as follows:
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(1)
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Overseas branch of a domestic financial company: It is challenging to determine the necessity of assigning responsibilities to officers of domestic financial companies to adhere to the laws and regulations of the foreign country where the domestic financial company's overseas branch is located, especially in cases where even Korean financial authorities are not empowered to enforce their regulatory jurisdiction. However, the responsibilities for overseeing the operations of overseas branches may be assigned to officers of domestic financial companies in cases where Korean financial authorities have the jurisdiction to intervene, particularly when the stability of the domestic financial company is compromised due to breaches of foreign laws and regulations by its overseas branch.
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(2)
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Domestic branch of an overseas financial company: It is challenging to justify the necessity of assigning responsibilities to officers of a Korean branch of an overseas financial company for adhering to foreign laws and regulations, particularly in cases where even Korean financial authorities lack the authority to enforce their regulatory jurisdiction.
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Now that the Commentary, which was developed in response to inquiries from the financial sector, has been released, financial companies are encouraged to create a Responsibilities Map and implement a monitoring system to ensure compliance with Internal Control Obligations, taking into account the insights and objectives provided in the Commentary. However, as some time remains before the deadline for submitting a Responsibilities Map and full application of the provisions regarding officers’ adherence to Internal Control Obligations, financial institutions are advised to engage in discussion with the financial regulators to clarify any areas that may require more precise and explicit guidelines, even beyond the scope of the Commentary.
Meanwhile, financial regulators intend to develop and release the Sanctions Guideline for Breaches of Internal Control and Risk Management Obligations (the “Guideline”), encompassing “key considerations for specific elements of violations warranting sanctions for non-compliance with Internal Control Obligations” and “key factors to be considered for determining reasonable care in relation to the breaches.” Hence, financial companies will need to formulate management strategies concerning Internal Control Obligations and incorporate the forthcoming amendments in consideration of the forthcoming Guideline.
Lastly, as the financial authorities are contemplating the implementation of a pilot operation phase and offering incentives to financial institutions engaging in the pilot program to promote early adoption and operation of the Responsibilities Map initiative, financial companies are well advised to closely monitor the regulatory developments around the pilot program.
[Korean Version]
