The Act on the Supervision of Financial Conglomerates (the “Act”) was enacted to provide legal grounds for the supervision of non-holding financial groups that are included as financial conglomerates. The Act is scheduled to take effect on June 30, 2021.
Incidents such as the massive failures of savings banks in 2011 and the fraudulent issuance of commercial papers by Tongyang Group in 2013 brought about discussions to introduce an integrated system for supervision of financial groups and strict separation of financial and non-financial industries.
Since July 2018, the financial supervisory authorities have given a test run to the supervisory system on financial groups by introducing best practice guidelines for supervising financial conglomerates with the plan to eventually legislate such system. The Act is expected to supplement the supervision that had previously focused on individual financial companies to provide a clear legal basis to manage and supervise risks at the group level.
The key features of the Act to be in effect on June 30, 2021 are as follows:
1. Designation of Financial Conglomerates
If financial companies in a single business group meet all of the following requirements, the Financial Services Commission (the “FSC”) will designate the group as a financial conglomerate (provided that a business group consisting of a financial holding company and its subsidiaries shall be excluded from such designation as a financial conglomerate):
Any business group with financial affiliates that are engaged in at least two of the following types of financial businesses: (a) credit financing and/or deposit business, (b) financial investment business and (c) insurance business;
Any business group with financial affiliates of which the aggregate total asset value is KRW 5 trillion or more;
Any business group with at least one financial affiliate licensed/permitted by the FSC or registered with the FSC;
Any business group with financial affiliates that are distressed financial institutions or equivalent thereto with the aggregate total assets lower than certain ratio; and
Not applicable in case where there will be minimal practical benefit from the supervision.
2. Appointment of Representative Financial Company and Financial Affiliate’s Duty to Cooperate
A financial conglomerate should appoint its representative financial company by considering its internal investment, total assets/capital amount and ownership/governance, among others. The representative financial company of a financial conglomerate should exercise control over all kinds of affairs in relation to the financial conglomerate, including internal control and risk management, financial soundness management and reporting and disclosure requirements. Financial affiliates other than the representative financial company should actively cooperate with the representative financial company when requested to submit documents and take measures, as necessary.
3. Internal Control and Risk Management of Financial Conglomerates
A financial conglomerate should establish and set group-wide internal control policy and standard, as well as risk management policy and standard, to ensure sound internal control and risk management at the group level through consultation with financial affiliates, by way of deliberation and resolution by the board of directors of the representative financial company. Further, a financial conglomerate may separately establish internal control and risk management institutions to assist such internal control and risk management of the board of directors of the representative financial company, by organizing and operating a consultative council consisting of the financial affiliates. Meanwhile, pursuant to the proposed regulations on supervision of financial conglomerates, which is currently undergoing enactment process, the internal control and risk management systems should include at least one representative financial affiliate from each of the credit financing and/or deposit business, financial investment business and insurance business, among others.
4. Soundness Management of Financial Conglomerates
A financial conglomerate should regularly evaluate and inspect capital adequacy at the group level with due consideration to, among others, double gearing between financial affiliates, inter-affiliate transactions or potential loss incurred from risk concentrations, and should recognize, assess, monitor and control risks of financial affiliates, conflicting interests with non-financial affiliates and risks derived from financial and management risk of non-financial affiliates. The proposed Enforcement Decree of the Act and supervisory regulations relating to the Act prescribe specific criteria of capital adequacy ratio to be followed by financial conglomerates to ensure financial soundness, and also prescribe methods to assess additional capital buffers against risk in consideration of additional risks at the group level, and the buffer ratio based on such assessment (up to 20% of buffer ratio according to assessment grades).
Further, if any major shareholder of a financial affiliate of a financial conglomerate intends to engage in any inter-affiliate transaction (including transactions made on behalf of major shareholders), such major shareholder should report key details of such transaction to, and obtain the approval of, the board of directors (affirmative votes of 2/3 or more of incumbent directors) in advance. According to the proposed Enforcement Decree of the Act, which is undergoing the legislative process, a single transaction whose amount is more than the lesser of (i) 5% of equity capital and (ii) KRW 5 billion should be subject to the board of directors’ approval for the inter-affiliate transaction.
5. Reporting and Disclosure of Financial Conglomerates
Financial conglomerates are required to report to the FSC through their representative financial companies and disclose on their websites certain details necessary for the protection of financial consumers, among others.
6. FSC’s Supervision and Evaluation and Order to Submit Management Improvement Plan
The FSC may require the representative financial company to submit or report relevant materials or issue other orders to monitor financial conglomerates’ compliance with duties and instructions provided by the Act. The FSC also has to assess the capital adequacy, risk status and actual management status of financial conglomerates on a regular basis.
In addition, in case the assessment results regarding the capital adequacy and actual risk management status of financial conglomerates fail to meet a certain standard, the FSC may order the representative financial company to submit a management improvement plan at the group level, containing all or part of the following items:
Plan to improve the internal control and risk management system of the relevant financial conglomerate;
Plan to expand capital or reduce risky assets;
Plan to reduce or remove inter-affiliate transactions or to spread risk concentrations;
Plan to suspend or remove investment or business relationship with non-financial affiliates where risks may spill over; and
Other matters prescribed by the Presidential Decree.
If a financial conglomerate fails to submit a management improvement plan or fails to implement such plan, the FSC may instead order its financial affiliates to take actions, including submission, modification or implementation of such management improvement plan.
7. Consideration of Matters Relating to Financial Conglomerates During Licensing Review Process
If the FSC, upon its review of the applications listed below, determines that any financial affiliate may be designated as falling under certain financial conglomerate along with other financial affiliates within the same business group, the FSC has to consider whether such financial affiliate meets the financial and management soundness requirements of the relevant business group:
Application for authorization, permission or registration for engaging in financial business or establishing a financial company;
Application for authorization or approval for merger, spin-off with merger, etc.; and
Application for approval for the acquisition and takeover of the shares of a financial company.
8. Sharing of Customer Information and Facilities Among Financial Affiliates Within Financial Conglomerates
For the purpose of internal control and risk management of financial conglomerates, financial affiliates may, (i) notwithstanding the Act on Real Name Financial Transactions or the Credit Information Act, provide personal credit information to other financial affiliates, and (ii) share IT systems, office space and facilities, as well as other resources.
The Act expressly prescribes the procurement of internal control, risk management and financial soundness management at the group level instead of the individual entity level, and requires the representative financial company to be in charge of overall responsibilities with respect to such affairs. Therefore, a representative financial company of a financial conglomerate is required to establish and improve internal organizations and systems to effectively carry out its overall responsibilities and comply with its legal obligations. Furthermore, a representative financial company is required to review and execute a plan to manage certain factors which affect the soundness of financial conglomerates (i.e., group risks, including, but not limited to, concentration risks or spreading of risks), and a plan to ensure the effectiveness of such plan, on an ongoing basis.
Further, the details of the Enforcement Decree of the Act and the proposed supervisory regulation for financial conglomerates, which will govern the details of the Act, are gradually being disclosed through legislation and administrative notices. Therefore, it would be important to monitor and assess the relevant subordinate laws that will come into effect.
We also recommend that you stay vigilant both on the possibility of expansion of the scope of financial conglomerates subject to the regulation and on the direction of relevant amendments.