FSS urges comprehensive investment firms to manage risks from high-interest promissory notes and IMAs

[Financial News] The FSS has called on securities firms to manage the risk of potential impairment among high-risk investment assets and liquidity risks in anticipation of expansion in the promissory note and Investment Management Account (IMA) markets. It stressed that high-interest promissory note products should be managed at sustainable levels that do not undermine financial soundness.
On the 12th, the FSS held a meeting on promissory notes and IMAs at the Korea Financial Investment Association (KOFIA), attended by chief risk officers (CROs), heads of asset management and other officials from nine comprehensive financial investment business entities.
The meeting was held in response to expectations that the related markets will continue to expand, following the recent approval of two securities firms to operate promissory note businesses and the growing variety of products eligible for inclusion in retirement pensions.
Seo Jae-wan, an assistant governor in the FSS’s Financial Investment Division, stressed that firms need robust risk management and a strong internal control system to protect investors and ensure a stable supply of risk capital.
The FSS called on firms to prepare in advance for the possibility of high-risk investment products, including overseas investments, becoming impaired amid significant domestic and international uncertainty over factors such as interest rates and stock prices. It also said that high-interest promissory note products being launched amid the recent rise in market interest rates should be managed at sustainable levels that do not undermine financial soundness.
The FSS called on firms to prepare crisis-situation analyses and emergency funding plans, and to carefully review plans for recovering funds invested in long-term assets. It also urged them to use the newly introduced adjusted liquidity ratio as an opportunity to diversify funding and investment maturities and improve their liquidity response systems.
The FSS stressed that the supply of risk capital needs to improve in quality as well as expand in scale. For comprehensive investment firms subject to the 30% cap, the amount of risk capital supplied rose from 9.6 trillion won at the end of the first quarter this year to 11.6 trillion won at the end of the second quarter. The ratio of risk capital supplied to funds raised through promissory notes and IMAs also increased over the same period, from 16.8% to 19.5%.
The FSS called on firms to actively identify companies with technological capabilities and growth potential that have been overlooked by investors, and to expand investment in venture and innovative companies through diverse channels. It also cited KB Securities as an example: the firm is receiving proposals from venture investment funds through its “Risk Capital Investment Platform” and reviewing capital commitments.
The FSS is also working with the financial investment industry to draw up “Best Practices for Risk Management in Corporate Credit Extension.” The guidelines are expected to cover the expertise and independence of credit review staff; review criteria for companies’ business, industry and financial risks and repayment plans; and post-lending monitoring procedures for changes in credit status and repayment ability.
The FSS also called on securities firms to prevent conflicts of interest with their proprietary assets in the course of managing promissory notes and IMAs, and to operate information barriers effectively. Through the “Information Barriers System Improvement Task Force,” which it is running with the industry, the FSS is discussing guidelines on the information covered, assessment criteria and operating procedures.
Regarding the temporary waiver, effective since the 9th, of the requirement to maintain collateral ratios for credit extensions, the FSS called on firms to clearly explain to investors the criteria each securities firm applies. It also urged them to fully implement existing measures to strengthen self-regulation of margin lending, including limits by stock and borrower, so the measure does not lead to an increase in debt-funded investing.
Participants said they would review their investor protection frameworks as a whole and incorporate the guidelines issued by the supervisory authorities into their internal regulations and business procedures. Newly authorized firms said they would focus on soundness and liquidity management for the time being and earn investors’ trust through stable operations.
The FSS plans to pursue regulatory improvements and draw up best-practice guidelines to strengthen risk management and internal controls related to promissory notes and IMAs, while continuing to monitor the supply of risk capital.
[email protected] Lee Jeong-hwa Reporter