FSS: "Securities Firms Must Move Beyond Post-Incident Audits"

Securities Firms’ Auditors Meeting Held
FSS Urges Shift Toward "Prevention-First" Approach

The Financial Supervisory Service (FSS) has once again instructed domestic securities firms to shift their approach to internal audits from post-incident detection to a focus on prevention. In particular, the FSS urged the successful implementation of the "Enhanced Self-Management Measures for Margin Financing," which call for firms to autonomously reduce margin loan exposures to specific stocks if they exceed 15% of the total, and also ordered firms to monitor the follow-up actions regarding the eradication of false and exaggerated advertisements.

On October 7, the FSS announced that it held a meeting at the Korea Financial Investment Association with auditors from 21 domestic securities firms to discuss strengthening investor-oriented internal audit functions. The event aimed to guide self-inspection and encourage effective internal controls by sharing the latest key audit findings and precautions.

Suh Jaewan, Deputy Head of the Financial Investment Division at the Financial Supervisory Service, said, "There is growing concern that despite the repeated occurrence of chronic illegal activities—such as including false or misleading information in product brochures provided to clients—internal controls have not functioned properly." He stressed, "The company’s audit teams must devote their full efforts to proactive investor protection through preventive audits, rather than merely conducting post-incident reviews."

Accordingly, the FSS requested that each company’s auditors thoroughly inspect whether investor protection processes are truly working as intended from an objective and neutral perspective. In relation to recent data breaches in the financial sector, the FSS called for a comprehensive re-inspection of IT security and monitoring systems, emphasizing heightened vigilance and the need to quickly identify and implement protective measures for any potential investor damages.

At the meeting, the FSS also provided guidance on recent findings from its review of product design and manufacturing processes, as well as on cautions related to stock lending and trading activities by liquidity providers (LPs) at securities firms.

In addition, the FSS called for thorough investor communication to support the establishment of the "Enhanced Self-Management Measures for Margin Financing," which were introduced for proactive risk management. This initiative requires firms to autonomously cap the volume of margin loans to no more than 90% of their equity capital (down from the previous 100%), and to voluntarily reduce exposures whenever margin financing for specific stocks exceeds 15% of the firm's total margin loans.

The FSS also asked companies to ensure that follow-up measures under the "Comprehensive Improvements to Advertising Work," intended to eradicate false and exaggerated marketing, are being properly implemented.

Auditors from the securities firms who attended the meeting shared a consensus on the importance of actively conducting proactive audits with an investor-centric perspective. They stated that they would scrutinize whether investor protection and risk management systems work reliably throughout all operations, and that, in addition to their own audits, they would strengthen internal controls autonomously and proactively by collaborating and communicating with supervisory authorities through consulting reviews and other means.

The FSS stated that it will continue to actively support the enhancement of preventive internal audit functions and audit capabilities at financial investment firms, while remaining open to opinions from the market and maintaining ongoing dialogue.

This content was produced with the assistance of AI translation services.