FSS issues warning to firms behind struggling real estate projects

Financial regulators have urged financial companies to sell unprofitable property projects and to increase provisioning to prepare for any risks amid concerns about project finance debt.

Financial Services Commission Chairman Kim Joo-hyun, left, and Financial Supervisory Service Gov. Lee Bok-hyun speak during a meeting with CEOs of local brokerage companies in western Seoul on Thursday. [YONHAP]

Financial regulators have urged financial companies to sell unprofitable property projects and to increase provisioning to prepare for any risks amid concerns about project finance debt.

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun told financial firms to “quickly and boldly sell” unprofitable real estate projects based on risk analysis and to “sufficiently raise provisions to preemptively prepare for a crisis,” in a meeting with regulators and heads of 10 brokerage companies held in western Seoul on Wednesday.

The attendants included Financial Services Commission (FSC) Chairman Kim Joo-hyun and the CEOs of KB Securities, Mirae Asset Securities and Samsung Securities.

The remark was made as some lenders of property projects face troubles due to losses on project finance debt, as the overall project finance delinquency rate at financial firms rose to 2.42 percent as of September last year, compared to 1.19 percent at the end of 2022, according to the FSS.

Lee warned brokerage companies and their executives will be held responsible if their failure to manage risks develops into a factor that disturbs the market.

“We will bear the noise [that may be triggered] between construction and financial companies in response to dealing with real estate project financing loans,” said Lee.

He added that the FSC discovered unsound sales activities based on the pursuit of private interest and told the CEOs of the brokerage firms to efficiently manage the internal control system and to strictly respond to executives that commit illegal practices, citing the structural problems at the companies.

The FSS found unsound sales activities and weaknesses in brokerage companies' internal systems upon inspection of five brokerage firms’ project finance businesses earlier this month.

The inspected companies were Daol Investment & Securities, Meritz Securities, eBest Investment Securities, Hi Investment & Securities and Hyundai Motor Securities.

An executive at one of the companies made some 50 billion won using the real estate development information obtained at work.

The financial firms said they would improve the sophistication of their IT systems and strengthen the internal control system in a bid to block unfair transactions and protect investors. They also pledged to strengthen review and follow-up management to prevent the sales of financial products without adequate information to investors.

The FSC Chairman Kim highlighted the need for brokerage firms to offer a comprehensive service, stressing their role in helping people accumulate wealth in the capital market.

“Brokerage firms should expand their roles into institutions that provide comprehensive corporate finance services from their current focus on consignment transactions and real estate sales practice,” Kim said.

Kim also stressed it is important for companies to voluntarily take action to raise shareholder value and to actively communicate with investors on why they are undervalued.

BY JIN MIN-JI [jin.minji@joongang.co.kr]