The Financial Supervisory Service criticized South Korean brokerages after inspections of their flagship branches turned up numerous cases in which internal controls failed to work, saying the firms need to make their compliance units function in practice.
Seo Jae-wan, deputy governor of the FSS, said on the 21st at the Korea Financial Investment Association in Seoul's Yeouido district, where he held a meeting with chief compliance officers from 21 domestic brokerages, that there is criticism of sales practices that line brokerages' own pockets, such as pushing clients into excessive margin and unsettled trades and passing on fees and costs. "At some flagship branches, there were also serious cases of weak internal controls, including illegal excessive trading, unauthorized discretionary and delegated trading, and unauthorized checks of client credit information," he said.
Since last year, the FSS has focused on unsound sales practices and the state of internal controls at brokerage branches with high concentrations of wealthy clients, known as flagship branches. The regulator has completed inspections of flagship branches at Samsung Securities, Meritz Securities, Korea Investment & Securities and Hana Securities, and an on-site inspection of a Mirae Asset Securities flagship branch is under way.
The FSS also said a recent review of how appropriately high-risk products are designed and manufactured found that brokerages' processes for protecting investors before problems arise remain inadequate. The regulator intends to see the authority of chief consumer officers strengthened, including giving them the power to demand reconsideration during the product launch process.
With overseas investment by domestic investors turning back to growth, the FSS asked the firms to review investor protection procedures again, including tighter internal controls over investment advertising, stronger oversight of local brokers abroad and more reasonable procedures for setting the fee rate on investors' foreign currency deposits.
"Compliance units need to properly carry out their control and management role as the company's red team," Seo said. "Management, including the chief executive, must also effectively fulfill its internal control management duties in line with the responsibilities map."
