The following amendments have been made to the Financial Investment Services and Capital Markets Act (“FISCMA”) as of May 20, 2021 (as amended, the “Amended FISCMA”) to strengthen the autonomy of financial investment entities.
I. ‘Ex-post’ reporting of concurrent or ancillary businesses
Before the Amended FISCMA, financial investment entities were required to make ‘ex-ante’ (i.e., prior) reports of any concurrent or ancillary business they proposed to undertake in addition to their main business. The effect was to make the reporting process tantamount to an approval process, making it cumbersome for financial investment entities to promptly promote and undertake new businesses.
Under the Amended FISCMA, the ‘ex-ante’ reporting obligation is now an ‘ex-post’ (i.e., subsequent) reporting obligation, meaning that new ancillary businesses may be reported within 2 weeks after their launch. For instance, in case of loan arrangement or agent services, a collective investment entity’s ex-ante reporting obligation has changed to an ex-post reporting obligation. The Enforcement Decree of the Amended FISCMA (the “Enforcement Decree”) stipulates the detailed procedures for reporting of concurrent or ancillary businesses.
In addition, the follow-up supervisory activities of the Financial Services Commission (“FSC”) have been reinforced such that the FSC may order the reporting financial investment entity to curtail or correct its operations if the report indicates: (A) a hindrance to the reporting entity’s management/operational soundness; (B) interference with investor protections; or (C) disruption of financial market stability.
II. Expanded scope of delegation/outsourcing
Before the Amended FISCMA, financial investment entities were highly restricted from delegating or outsourcing their prescribed duties to third-parties due to concerns that such delegation/outsourcing would hinder investor protections or disrupt sound trading order.
However, the Amended FISCMA now permits delegation/outsourcing of prescribed duties that are not ‘duties subject to internal controls’ (i.e., duties involving internal decisions and assessment of risk, compliance or audit issues), thereby expanding the scope of duties that financial investment entities may delegate/outsource to third-parties.
Under the Enforcement Decree, unless the FSC announces an express exception, the scope of ‘duties subject to internal control’ (and thus cannot be delegated/outsourced) includes the following:
A. duties of compliance officers prescribed under the Act on Corporate Governance of Financial
Companies, except as may be selectively determined and announced by the FSC;
B. internal audit duties;
C. risk management duties; and
D. duties requiring analysis and assessment of credit risks.
In addition, the prohibition on ‘sub-delegation’ of duties has been repealed, meaning that a delegated third-party may, with the consent of the delegating party/principal, sub-delegate the delegated duties to another third-party.
III. Blocking of information exchange to be prescribed by independent internal control
Before the Amended FISCMA, the FISCMA and its Enforcement Decree stipulated the types of information subject to, and methods for, blocking of information exchange (e.g., such as by prohibiting the holding of concurrent offices by the same individual and by requiring physical separation of office/working space).
However, the Amended FISCMA now prescribes only the fundamental principles for blocking information exchange, and that financial investment entities may determine the specifics in accordance with their independently established and operated internal control standards. To provide further direction, the Enforcement Decree stipulates the scope and types of information exchange required to be blocked and subject matter to be covered in the internal control standards.
The Korea Financial Investment Association has prepared sample internal control standards in the past and is now preparing sample internal control standards in line with the Amended FISCMA. However, the specific scope of information exchange required to be blocked is to be independently established by financial investment entities pursuant to their respective internal control standards. Accordingly, financial investment entities will need to re-write and establish their internal control standards to meet their individual needs and the requirements of the Amended FISCMA and Enforcement Decree.
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