The Act on Governance of Financial Institutions (the “AGFI”) which was promulgated on July 31, 2015 comes into effect as of August 1, 2016. In preparation for enforcement of the AGFI, legislators are collecting feedback from the industry on proposed draft bills of sub-regulations designed to work in tandem with the AGFI. Among these, the Enforcement Decree of the AGFI (the “Enforcement Decree”) is particularly important.
The key terms of the draft bills and the Enforcement Decree which may have an impact on foreign financial institutions which have a presence in Korea (offices that constitute such a presence shall henceforth be referred to as a “Korean Office”), are as follows:
The following items are applicable regardless of whether a Korean Office is a branch office or a subsidiary.
- Disclosure obligations for the appointment or dismissal of an executive officer1 .
The AGFI seeks to ensure that executive officers are highly qualified and special procedural processes due to the importance of their positions. Accordingly, executive officers shall be subject to enhanced qualification requirements in comparison to other employees and officers. Also, when an executive officer of a Korean Office is appointed or dismissed, the Korean Office will be obligated to concurrently (i) disclose the event on its website and (ii) file a report to the Financial Services Commission. 2.
- Implementation of internal control policies and risk management policies
All financial institutions will be required to maintain internal control policies which cover (i) internal organization and the assignment of roles and organization, (ii) the respective roles and responsibilities of directors, officers and compliance staff in the implementation and maintenance of such internal controls, (iii) procedures and measures designed to prevent illegal activities by both officers and employees, and (iv) the promotion and protection of internal whistle blowing.
Additionally, all financial institutions must establish internal policies covering (i) risk management principles, (ii) organization of risk management personnel and their respective responsibilities, (iii) standards for acceptable level of risk, (iv) optimal investment limits, (v) maximum loss limits, and (vi) internal decision making procedures for risk management concerns.
- Appointment of compliance officer and chief risk officer
All financial institutions with total asset sizes of at least KRW 500 billion shall be required to appoint a compliance officer and chief risk officer from amongst its executive officers. Financial institutions with less than such a total asset size may appoint a compliance officer and chief risk officer from amongst its other employees. However, the foregoing requirements shall not be applicable if the financial institution is (i) engaged only in the investment advisory business or the discretionary investment management business and (ii) its total assets under management is less than KRW 500 billion.
The term of office for compliance officers and chief risk officers must be at least two (2) years. Notably, appointment and dismissal of the compliance officer or chief risk officer must be subject to a resolution of the financial institution’s board of directors.
In addition to the foregoing, in the case a Korean Office is a subsidiary, the Korean subsidiary shall also be subject to following requirements. However, a Korean subsidiary with a total asset size below a set of thresholds established by the AGFI2 shall be exempt from the application of items 4 to 7 below.
- Minimum requirements for outside directors
The majority of a financial institution’s board of directors must be comprised of outside directors. At a minimum, there must be at least three (3) outside directors serving on the board. In the case the total asset size of a financial institution is between KRW 100 billion and KRW 2 trillion, the relevant financial institution is only obligated to have at least a quarter of its board of directors comprised of outside directors.
- Establishment of an internal governance standard
Financial institutions shall be required to establish an internal policy relating to (i) the formation and operation of the board, (ii) professional qualification requirements for officers, (iii) qualification requirements for representative directors, (iv) officer performance standards, and (v) procedures for the succession of controlling authority over the financial institution.
- Sub-committees of the board of directors
Financial institutions must form the following sub-committees under the board of directors: (i) an officer candidate recommendation committee, (ii) an audit committee, (iii) a risk management committee and (iv) a remuneration committee. The chairmen of each sub-committee must be an outside director.
When appointing executive officers, financial institutions must first procure a resolution from their officer candidate recommendation committees.
Further, the AGFI requires that remuneration for the officers (except for the outside directors, audit committee members, compliance officers, and chief risk officers) and the key personnel in charge of investment management (who have significant influence over the soundness of their financial institutions due to their responsibilities regarding the structuring of financial instruments and execution of investments) should be determined by a resolution of a remuneration committee. Additionally, a certain percentage of performance linked remuneration must be deferred over a certain period of time. Specific details regarding the scope of employees subject to these requirements are to be further determined in upcoming sub-regulations of the AGFI.
- Restrictions on dual positions
Key personnel such as chief strategy officers, chief finance officers and chief risk officers must be appointed and dismissed by a resolution of the board of directors. In order for representative directors, executives, compliance officers or risk officers to simultaneously hold a dual position as a member of the financial institution’s key personnel in addition to their other positions of leadership, they must receive prior approval from the relevant regulator(s).
- Enhanced soundness monitoring
The AGFI adopts enhanced soundness standards by employing broadened qualification tests for major shareholders. In addition to the standard qualification test exercised when the major shareholders are to be changed, the AGFI shall apply on-going qualification tests to the largest shareholder biannually. Failing such an on-going qualification test shall subject the relevant shareholders to a suspension of voting rights for a certain portion of their shares for up to 5 years.