South Korea's Financial Supervisory Service told brokerage compliance officers to strengthen investor-protection focused control systems, pointing to weak internal controls at sales sites such as inducements for excessive credit and margin trading and illegal churning.

The FSS on Sept. 21 held a meeting of brokerage compliance officers at the Korea Financial Investment Association, with compliance officers from 21 major brokerages attending. The meeting was attended by 10 comprehensive financial investment business operators and 11 mid-sized brokerages.

The FSS shared the results of recent major inspections and checks, and the results of checks on management measures at each stage of financial product launches. It asked brokerages to reflect them in their compliance work.

Seo Jae-wan (서재완), deputy assistant governor of the FSS’s financial investment sector, stressed that as brokerages have grown in size along with the growth of the capital market, their responsibilities as financial companies have also expanded. He pointed out that showy investor protection makes it difficult to meet the changed level of investor expectations.

The FSS said criticism continues over inducements for excessive credit and margin trading and the shifting of fees and costs. Inspections of some brokerage hub branches also confirmed cases of weak internal controls, including illegal churning, illegal discretionary and managed trading, and unauthorized access to customers’ credit information.

Recent checks of the design and manufacturing process for high-risk financial products also assessed that preventive investor-protection procedures were not sufficient. The FSS said compliance departments should serve as an internal “red team” from the product planning and review stages to check risk factors and potential conflicts of interest.

It also stressed management’s responsibility under the implementation of the accountability structure. It said management, including the CEO, should effectively carry out its duty to manage internal controls and support the compliance department so it can have sufficient authority as well as staffing and physical resources.

The FSS also presented specific management measures to reduce internal control gaps in the manufacturing and sales stages of financial products. In the manufacturing stage, it called for checking the effectiveness of product review committee operations and examining product risk and potential conflicts of interest, and in the sales stage, it called for reviewing the appropriateness of sales procedures and the causes of violations to draw up improvement measures.

It also called for strengthening the authority of chief consumer officers, or CCOs. It said there is a need to examine the possibility of consumer harm throughout the product launch process, including granting CCOs the right to request reconsideration during the manufacturing and launch of new financial products and the setting of performance evaluation systems.

Compliance departments should also serve as a second-line check by re-verifying management measures carried out by business departments under the accountability structure. This would involve follow-up management and ongoing monitoring of shortcomings identified during the management measures process.

Internal controls related to overseas investment were also included in the inspection scope. The FSS asked brokerages to reflect effective investor-protection indicators in key performance indicators, or KPIs, and to strengthen internal controls over overseas stock events and investment advertising. It also told them to recheck procedures for selecting and managing local overseas brokers and for calculating fee rates for the use of investors’ foreign-currency deposits.

It also checked implementation of the comprehensive plan to improve advertising operations announced on Sept. 1. The FSS urged brokerages to strengthen internal controls to prevent false and exaggerated advertising and to embed recently introduced systems, including the accountability structure and advertising regulations, at the business site.

The FSS said it plans to pursue improvements to rules related to securities firm platforms and communities, along with overhauling information-barrier systems. It said it will continue to communicate with brokerage compliance officers and reflect suggestions from the field in institutional improvements and guideline preparation.