The Financial Services Commission (the “FSC”) recently enacted an amendment (the “Amendment”) to the Regulations on the Audit and Sanction of Financial Institutions (the “Audit Regulations”), which went into effect on October 11, 2017.  

This Amendment is designed to give structure to the amendment of ten major finance-related enforcement decrees for reforming the sanction system for the finance sector, all of which took effect on October 19, 2017.

Summary of the Amendment:

1. Restructuring the standard for imposing monetary penalty

Prior to the Amendment, the standard imposition rate of monetary penalty was set only in consideration of the amount relating to the violation (e.g., unjust enrichment), and did not reflect other standards (e.g., manner or severity of such a violation).  

However, the Amendment applies differential rate not only according to the related amount, but also to the severity of the violation.  As a result, it is estimated that the amount of penalty imposed will increase by approximately 2.47 times.

Also, the Amendment inserted new grounds for the reduction or exemption of the penalty.  When the estimated penalty exceeds 10% of the institution’s equity or ten times the institution’s unjust enrichment, such excessive amount may be exempted from the sanctions.  Further, when there is reasonable ground for the offender’s error such that his or her conduct was not wrongful (i.e., when the offender made the conduct according to the administrative supervision, or public opinion of public officials, including the Financial Supervisory Service (“FSS”)), the penalty may be exempted.

2. Improving the standard for imposing administrative fine

While there was controversy in deciding the amount of administrative fine when there are two or more violations or wrongful acts of the same type, the Amendment clearly states that in principle, the amount of administrative fine is to be separately applied to each violation or wrongful act.

Further, the Amendment enables the reduction of fine by 30% – separately for each case of a voluntary report and/or a voluntary correction.  Prior to the Amendment, the reductions were taken together as a single reduction.  Thus, the Amendment seeks to actively encourage the institution’s voluntary report and voluntary amendment. 

3. Repealing regulations without legal grounds

Because sanctions should be imposed according to the grounds provided by law, the Amendment  repeals the pre-amendment provision that listed the violations and wrongful acts subject to sanctions  for lacking a legal basis.

Additionally, the Amendment repeals the pre-amendment provision that restricts an institution from using its own discretion to impose sanctions on its employee for his or her violations or wrongful acts before the FSS requests for such measures (since such a provision lacks legal grounds). 

Significance:

With the Amendment, the level of the standards for imposing monetary penalty and administrative fine has been substantially heightened.  As such, we expect that the amended monetary penalty and administrative fine to be actively utilized as disciplinary measures against financial institutions.