On January 27, 2022, the Financial Supervisory Service (the “FSS”) announced the “Innovation Measures for Audit and Sanctions” (the “Measures”), which focuses on: (i) a law and principle based approach, (ii) balance between ex ante and ex post supervisions, and (iii) strengthening preventive supervision for consumer protection.
In August 2021, shortly after the incumbent Governor of the FSS took office, an internal task force was launched to improve audit and sanctions procedures on financial companies, which resulted in the announcement of the Measures. The Measures will likely influence the entire financial industry, including banks, securities companies and insurance companies. We have summarized below the key changes envisioned in the Measures:
1. Changes to Audit Procedures
Introduction of Regular and Non-Regular Audits
Previously, FSS audits were categorized into comprehensive and sectoral audits based on the audit scope. Moving forward, FSS audits will be categorized into Regular and Non-Regular Audits based on the timing of the audit. The audit cycle, scope, etc. will vary according to the characteristics of each company and the financial sector in which it belongs.
Regular audits will be conducted every two years for commercial banks, every four years for comprehensive financial investment business entities, and every three years for major insurance companies, taking into account factors such as the size of the financial companies and their influence on the market. The audit scope will be determined on a case-by-case basis based on the characteristics of each company and the sector in which the company belongs, as well as the results of the FSS’s management status evaluation and audits on core/vulnerable areas.
On the other hand, non-regular audits will be conducted from time to time on certain issues such as financial accidents, consumer protection and risks when the need arises, and are likely to be similar to the previous sectoral audits.
Improvement of Management Status Evaluation
Due to criticisms that the previous FSS management status evaluation procedure was too broad and burdensome while not being very useful, its specific evaluation criteria will be completely overhauled to reflect the characteristics and risks of each sector.
Improvements that are being considered include (i) reassessing the usefulness of each evaluation item (including the evaluation checklist), (ii) specifying the basis for non-quantitative evaluations to reduce arbitrary scoring amongst evaluators, and (iii) comparative evaluation with peer groups.
2. Strengthening Preemptive Supervision
Strengthening Information Exchange with Financial Companies and the Regular Surveillance Function
Moving beyond the previous RM (Relationship Manager) regime, the FSS will designate compliance officers or auditors as “liaisons” to establish an official information channel for each financial company, and will hold regular business meetings between the FSS’s audit team in charge and the liaisons. Such changes will emphasize the role of compliance officers and auditors.
Meanwhile, the FSS will identify and analyze potential risk factors (e.g., high sales volume of high-risk financial products, tipping effect among sectors, etc.) across multiple sectors from their regular surveillance, and utilize such information for sectoral audit planning and collaborative audit.
Expansion of Self-Audit Procedures
In order to promptly review and address potential risk factors of financial companies, the FSS plans to introduce a “self-audit request system” (tentative) that mandates financial companies to conduct self-audits.
Once the system is introduced, financial companies will conduct self-audits at the request of the FSS and report the results to the FSS through their board of directors. The FSS will approve the remedial measures taken by financial companies unless the self-audit activity is considered unsatisfactory or false information has been reported.
3. Improvement of Audit Process
Improvements for Communicating Audit Results
The following communication channels will be put in place before audit results are notified after the audit is completed.
(1) Interviews with the management will be conducted flexibly both before and after the audit, and the “post-audit review” process, which has been criticized as being authoritative or inefficient, will be eliminated immediately.
(2) In principle, the FSS will issue an audit opinion at the audit site so that financial companies can fully understand the issues identified as soon as possible and respond accordingly. The audit opinion will be re-issued in the event of material changes.
(3) The FSS will introduce a process where the director of the FSS audit bureau directly listens to the opinions of those identified for potential sanctions, auditors, and responsible officers. This process will commence if there is a strong disagreement between the audit team and the audited company before prior notice of the audit results is given, or at the request of the above persons.
Sectoral and Inter-Sectoral Consultative Body for Fair Audit
The FSS plans to amend the Working-Level Operation Guidelines to operate a “Prior Consultative Committee on Audit Measures” within sectors and across sectors, to ensure fair audit results can be obtained when the internal audit bureau begins its review.
(1) The Deputy Governor of the FSS in charge of the sector will preside over the Sectoral Prior Consultative Committee, and will consult with the heads of the sector’s supervisory and audit departments concerning all planned sanctions.
(2) The Inter-Sectoral Prior Consultative Committee will be presided over by the First Senior Deputy Governor, and attended by each sectoral Deputy Governors of the FSS. The committee will discuss common and/or similar sanctions that apply to multiple sectors.
Over the years, the FSS has continued its efforts to improve the audit and sanctions framework, as shown by its multiple abolitions and reinstatements of the comprehensive audit on financial companies.
As the FSS aims to implement the announced Measures by the first quarter of this year (with the exception of the improvement on the management status evaluation system, which will be implemented by the third quarter of this year), we advise financial companies to carefully review the Measures’ detailed implementation directions and promptly prepare for the improvement of their internal control system, as the self-audit request system may soon be implemented.