On March 17, 2023, the Financial Services Commission (the “FSC”) announced an improvement plan to revamp the system for imposing administrative fines (the “Plan”) with the aim of enhancing transparency in the administration of financial penalties and providing better visibility in the amount of administrative fines that can be expected by the parties in breach of the law. The FSC announced that it will form a task force to come up with detailed measures to implement the Plan.
1. Imposition of Administrative Fines on the Accountable Person
Under the current regime, even where financial companies are accountable for breaches of the law, the responsible officers and employees of the subject financial company can be imposed an administrative fine. To ensure that financial penalties are effective deterrent measures, the Plan proposes to specify accountable persons under the law and impose administrative fines on those persons. This change aligns with the original intent of the regulations on administrative fines.
2. Specification of the Conduct Subject to Administrative Fines
Some of the financial sector laws, such as the Bank Act and the Financial Holding Companies Act, state only broad and general provisions as legal basis to impose administrative fines, without detailing the specific acts that would be subject to an administrative fine (“General Penalty Provisions”). Under the Plan, the FSC proposes to amend the laws where required, so that the General Penalty Provisions will be replaced with provisions mapping the administrative fines that can be imposed for specific conduct in violation of the law. Until the necessary legislative amendments are adopted, the regulators indicated that they would not impose administrative fines based on the General Penalty Provisions.
3. Determination of the Amount of the Administrative Fine in Line with the Statutory Ceiling
The Plan states that the base amount of administrative fine that can be imposed will be increased to be in line with the statutory ceiling (“Upper Limit”). As the enforcement decrees under some of the financial sector laws have set the levels of administrative fine to be too low in comparison to the Upper Limit, the FSC plans to set the base amount to be at least 30% of the Upper Limit so as to better align with the legislative intent.
4. Standards for Calculating the Administrative Fines
In 2014, standards were established for calculating the total amount of administrative fine by counting each instance of a breach involving the same conduct (“Number of Breaches”) along with permitted exceptions. However, as there have been cases of deviations from this standard, the FSC plans to conduct case studies of precedents and set standards for counting the Number of Breaches so that there is uniformity in the calculation methodology going forward.
5. Self-remediation for Minor Violations
Under the current laws and regulations, there is no basis to exempt a person or a company from administrative fines even in the case of a minor breach of the law. The FSC will consider first allowing the violator an opportunity for self-remediation in the case of simple and minor violations rather than immediately imposing fines.
6. Administrative Penalties vs Administrative Fines
Where a certain violation should be subject to administrative penalties in light of the gravity and nature of the violation, the law only requires the imposition of an administrative fine. “Administrative penalties” apply to those breaches which are considered to be more serious than those breaches that would be subject to “administrative fines.” Without a clear delineation and differentiated implications in sanctions between “administrative penalties” and “administrative fines,” the effect of imposing financial penalties may not be achieved. As a result, the FSC plans to revamp the regime for determining “administrative penalties” versus “administrative fines” for the financial sector, taking into consideration the examples from laws governing other industries and their respective practices, such as the anti-trust laws.
The initiatives outlined in the Plan are part of the financial supervisory authorities’ efforts to reform the inspection and sanction framework for the financial sector in order to enhance the transparency and predictability of financial supervision, which is one of the 110 national tasks of President Yoon’s administration. It is understood that this initiative aims to reduce the level of discretion in financial supervision whilst instilling a culture of accountability and self-regulation on the part of the industry, complementing measures to improve the system of internal control in the financial sector being promoted by the FSC.
The FSC will form a working-level task force and an expert panel to come up with specific implementation plans with a target timeline of 2Q 2023, whilst the framework for delineating between administrative penalties and administrative fines will be reviewed by the 4Q 2023. The necessary legislative amendments will be progressed in the second half of this year which will mostly involve amending the Bank Act and the Real Name Financial Transaction Act. It will be necessary to continuously monitor the progress in improvements to secure predictability and transparency in financial supervision and establishing a culture of self-remediation in the financial sector.