“Are securities firms’ ‘internal controls’ working?” ... FSS holds meeting with securities firm auditors

[Financial News] The Financial Supervisory Service (FSS) met with securities firm auditors to review recurring unsound business practices and the state of internal controls.
On the 7th, the FSS held a meeting at the Korea Financial Investment Association in Yeouido, Seoul, for auditors from 21 major securities firms. The meeting, titled “Securities Firm Auditors’ Meeting to Strengthen Investor-Centered Internal Audit Functions,” was attended by 10 comprehensive financial investment business operators, 11 mid-sized securities firms, and others. The FSS shared recent major inspection findings and guidance on internal controls, and encouraged firms to conduct their own reviews and improve their internal controls.
The FSS said the industry needs to reflect on whether the level of internal controls is adequately meeting investors’ expectations in light of the securities sector’s growth in scale. It found that internal controls had failed to function properly despite the continued recurrence of entrenched unlawful practices, such as including false or inadequate information in product descriptions and using personal mobile phones during sales without even keeping records of investment solicitations.
The FSS also called for an internal audit system focused on prevention. It stressed that audit departments should move beyond “after-the-fact” audits and take proactive steps to protect investors, and urged senior management, including CEOs, to strengthen audit capabilities by providing staffing and resources.
It also requested findings from inspections of product design and manufacturing processes; guidance on stock-lending business practices in the course of liquidity providers’ (LPs’) operations; voluntary management of credit extended at no more than 90% of equity capital; voluntary reductions when margin loans for a particular stock exceed 15% of the firm’s total margin loans; and checks on whether follow-up measures under the comprehensive plan to improve advertising practices and eliminate false or exaggerated advertising have been implemented.
Regarding a series of recent personal-information hacking incidents in the financial sector, the FSS called on each securities firm to comprehensively review its information technology (IT) security and inspection systems, quickly assess the risk of harm to investors, and immediately implement protective measures if necessary.
Seo Jae-wan, the FSS Assistant Governor for Financial Investment, stressed, “Declarations and pledges to protect investors that securities firms have made to their customers must no longer remain mere stopgap slogans,” adding, “Audit departments must take an objective and impartial view and check whether investor-protection procedures are working properly.”
The FSS plans to continue supporting securities firms in strengthening their preventive internal audit functions and audit capabilities, and to maintain communication with the industry so that companies’ own audits can be linked with inspections by supervisory authorities.

[email protected] Im Sang-hyeok Reporter