The Financial Supervisory Service (FSS) has decided to significantly strengthen its inspection system in the capital market, including the asset management industry, as illegal activities persist. Furthermore, ailing and illegal companies found in violation of regulations will face immediate cancellation of their registration as a measure to enhance continuous expulsion.
The FSS announced on Oct. 9 that it has come up with a revised comprehensive inspection system plan, focusing on strengthening the capacity and innovation of financial investment inspections, in close cooperation with the Financial Services Commission (FSC).
The FSS has decided to pursue an overhaul of the current rigid inspection system due to the recurrence of longstanding illegal activities such as employee self-dealing and incomplete sales of private equity funds, despite the external growth of the capital market. It has been deemed that the current system is ineffective in addressing these issues.
Indeed, the number of financial investment firms subject to inspections, including securities and futures companies, asset management firms, advisory firms, and trust companies, increased significantly from 328 at the end of 2012 to 893 at the end of last year. However, the inspection workforce only saw a slight increase from 90 to 111 during the same period.
In particular, there has recently been a significant increase in complex incidents involving multiple companies in the process of product launching, sales, and management as well as interconnected incidents where financial investment firms utilize products from other companies or conduct transactions through intermediaries. As a result, financial authorities have faced challenges in swiftly understanding the essence of these incidents.
The FSS conducted comprehensive inspections through the Special Inspection Team for Asset Management Companies dedicated to inspecting asset management firms due to the increasing illegitimate activities in the asset management industry. However, the team’s operation is set to conclude by the end of this year.
The overhaul plan involves regularizing the special inspection team, which is currently a temporary organization, and restructuring the inspection organization into three levels: Financial Investment Inspection 1, 2, and 3. The industry division has been eliminated, allowing Financial Investment Inspection 1, 2, and 3 to handle inspections of both securities firms and asset management companies regardless of their sector.
The plan has shifted from the previous “institution-centered inspection” to a “case-linked inspection” approach, allowing the relevant department to conduct simultaneous linked inspections of group, affiliated, and related companies in the event of specific incidents.
The overhaul plan also acknowledges that the delayed expulsion of troubled or illegal companies has resulted in significant losses for investors. To address this, it aims to activate continuous expulsion in the future. Over the past five years, there have been a total of 452 entries into the registered financial investment industry, such as asset management and advisory firms. However, supervisory authorities have only expelled 12 of these through deregistration or revocation of licenses.
As part of the plan, a company will face immediate deregistration, or a one-strike penalty, for even a single offense if it engages in organizational customer interest infringement, large-scale embezzlement, misappropriation, or any such violations. In addition, companies that fail to meet the registration retention requirements will be promptly revoked by authority. This revised inspection system will be implemented starting from Oct. 13.