Responsibilities map to enhance internal control at financial firms

Kim Joo-hyun, chairman of the Financial Services Commission, makes a statement at the meeting held at the Korea Press Center in Seoul, on June 22. [Photo provided by FSC]

South Korean financial authorities will introduce a new system that determines the scope of responsibility of financial company executives in advance. The move comes as they seek to eliminate the practice of trying to avoid responsibility in the event of major financial accidents and raise awareness of internal control.

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) held a meeting with the heads of financial associations in Seoul on Thursday.

Under the plans announced during the meeting, financial institutions will have to come up with a “responsibilities map” that lists responsibilities for internal control for each executive, including the chief executive officer, chief risk officer, and chief customer officer at lenders.

The responsibilities map should be finalized by each lender after the board’s approval before being submitted to the financial authorities.

“By identifying the ultimate responsible party for key tasks in a financial firm, the responsibilities map aims to implement the principle that internal control responsibilities cannot be delegated to lower levels,” the FSC said.

“This is an approach that has been successfully practiced in major countries such as the U.K. and Singapore and will help enhance the international alignment of Korea’s internal control system.”

The executives listed in the responsibilities map are required to fulfill their obligations for internal control management by constantly examining the adequacy, employee compliance, and effectiveness of the internal control standards.

In particular, the CEO is responsible for the overall drafting of the map and for overseeing each executive’s control activities. The CEO can be held accountable for failing to fulfill these management responsibilities in the event of systematic failures such as systematic, long-term, repeated, or widespread incidents.

There have been little and unclear grounds to sanction CEOs even when large-scale financial incidents such as embezzlement or sales of bad funds occur.

The new system will provide a clear basis for holding accountable the executives that breach their duty for internal control management through removal or suspension from office.

The financial authorities stressed that the focus of the reform is on preventing financial incidents, not on sanctioning financial company executives. Accordingly, liability will be reduced or exempted if objective, foreseen management measures are taken to handle a financial incident.

The board’s role in monitoring internal control will also be specified.

Matters related to internal control and risk management policies have been subjected to the board’s deliberation and approval, and an internal control committee will be established as one of the board’s subcommittees.

The FSC plans to speed up law revision to reflect the changes and apply the measures to banks and financial holding companies before expanding to large investment companies, insurers, and small- and mid-size financial companies.