The Financial Services Commission (the “FSC”) submitted a proposed legislation for the Act on Supervision of Financial Groups (the “Proposed Act”) to the National Assembly’s plenary session in September 2020, aiming to establish legal grounds for supervision of financial groups.

Financial groups which are not part of a holding company structure are currently subject to the pilot supervision program that is in operation pursuant to the “Guidelines for Supervision of Financial Groups” (the “Guidelines”) established by the FSC on July 2, 2018.  Accordingly, the Proposed Act is intended to establish legal grounds for the pilot supervision program.

We summarize the key points of the Proposed Act as follows:

1.   Similarities to the Guidelines
 

While having a structure that is basically similar to that of the Guidelines currently on a pilot run, the Proposed Act includes the following:
 

• Designation as a financial group: The FSC proposes to designate certain “Financial Groups” where (a) a group of affiliated companies are engaged in at least two types of financial businesses―which are (i) lending and/or deposit taking, (ii) insurance or (iii) financial investment businesses―, and (b) the aggregate total asset value of all the financial companies within the financial group is KRW 5 trillion or more (however, financial holding companies, etc. are not subject to supervision under the Proposed Act).

• Appointment of a representative financial company: From the financial companies within a Financial Group, the FSC will appoint the financial company that can exercise the greatest de facto influence over the affiliates in the Financial Group as the “Representative Financial Company” in consideration of total amount of assets and ownership structure.  The Representative Financial Company is responsible for internal controls, risk management (including deliberation and resolution of key matters regarding internal control and risk management systems by the board of directors of the Representative Financial Company), management of soundness, and reporting and public disclosure of key risk factors pertinent to the Financial Group.

• Requirement to establish internal control and risk management systems: The Financial Group must implement adequate internal control and risk management systems based upon discussion with financial companies within the Financial Group and through deliberation and resolution by the board of directors of the Representative Financial Company.  For this, the Financial Group may organize and operate a consultative council consisting of the affiliated financial companies.  The Proposed Act also stipulates that if any major shareholder of a financial company is engaged in important inter-affiliate transactions for his/her own account or for a third party’s account, he/she must (i) disclose to the board of directors in advance any material facts concerning such transactions, (ii) have those transactions approved by at least two-thirds of the board of directors, and (iii) ensure that transactions are carried out in accordance with fair procedures, as required by the self-dealing criteria set forth in Article 398 of the Korean Commercial Code.

• Management of soundness: The soundness of a Financial Group will be managed with due consideration to, among others, the possibility of multiple uses of capital (i.e., double or multiple gearing) by affiliates within the Financial Group and the possibility of risk spreading within the Financial Group.

2.   License and Management Soundness Review Standards
 

When reviewing an application for license or registration to conduct business as a financial company or an application for a change in major shareholder of a financial company would result in the affiliated financial group’s designation as a Financial Group, the FSC must also consider whether the affiliated financial group satisfies the requirements for management soundness under the Proposed Act.

3.   Establishing Legal Grounds for Supervision, Examination and Sanctions
 

Unlike the current Guidelines, the Proposed Act empowers the FSC to undertake direct and legally enforceable measures against financial companies and their officers/employees upon breach of regulatory requirements, including the imposition of administrative sanctions, penalties and administrative orders such as an order to submit a management improvement plan. 

4.   Provision of Customer Information and Permission for Joint Advertising and Use of Resources
 

The Proposed Act addresses certain additional matters not stipulated in the Guidelines.  Notably, a financial company within a Financial Group may (i) provide any other financial affiliates of the Financial Group with financial transaction information, personal credit information and information on aggregate securities―all of such information is held with respect to its customers―for internal management and risk management purposes, and (ii) engage in joint advertising or joint use of IT systems, office spaces, sales stores and other similar resources with any other financial affiliates.

Under the Proposed Act, the FSC is required to provide a written notice to the Representative Financial Company once a financial group has been designated, or removed from designation, as a Financial Group.  Financial groups currently subject to the pilot supervision program are likely to be designated as Financial Groups upon enactment of the Proposed Act. 

The Proposed Act will hold the Representative Financial Company primarily accountable for failures or inadequacies in internal controls, risk management and management soundness of the Financial Group.  As the Proposed Act empowers the regulators to impose sanctions on financial companies and their officers/employees in violation of applicable regulatory requirements, their Representative Financial Companies should endeavor to establish a system that is designed to effectively verify and ensure compliance with the matters subject to supervision and examination by the regulators.

Once approved by the National Assembly during its plenary session, the Proposed Act will take effect six months after the date of promulgation.  As the content of the Proposed Act and its enforcement decree and subordinate laws may change during the legislative process, we advise financial companies to monitor the latest developments in legislation of the National Assembly.