Regulator orders tighter internal controls at brokerages as volatility rises

FSS flags excessive overseas investment ads, urges currency risk management

Watchdog reaffirms zero tolerance for unsound sales practices

Seo Jae-wan, deputy governor of the Financial Supervisory Service [FSS]
Seo Jae-wan, deputy governor of the Financial Supervisory Service [FSS]

The Financial Supervisory Service has issued a warning against excessive overseas investment marketing that has capitalized on heightened volatility in domestic and international stock and foreign exchange markets. The regulator said it will take strict action against high-risk investment solicitations that highlight only potential returns, as well as other unsound sales practices.

The FSS said Thursday it held an "internal audit meeting," convening auditors from major brokerages to discuss strengthening internal controls and investor protection measures. Auditors from 12 securities firms attended, including 10 comprehensive financial investment business operators as well as Toss Securities and Kakao Pay Securities.

In his opening remarks, Seo Jae-wan, deputy governor for the financial investment sector, said investor trust in the resilience of South Korea's capital markets is especially critical during periods of heightened stock and foreign exchange volatility. "Market-disrupting behavior that illegally exploits volatility, or unlawful sales practices that disregard investor protection, can never be tolerated," he said.

He added that the FSS would respond firmly to "irresponsible sales behavior that advertises or solicits high-risk, concentrated investment in specific sectors while emphasizing only investment returns."

Seo said the regulator is particularly concerned that marketing competition is overheating in the brokerage and advertising of overseas investments targeting retail investors.

"There are concerns that marketing is becoming overheated in the process of brokering and advertising overseas investments to retail investors," he said. "Brokerages must do everything possible to protect investors from excessive currency risk exposure."

The FSS also called on brokerage audit departments to conduct preemptive checks and oversight to ensure internal controls do not loosen during the current period of heightened market volatility. It said sales practices that stoke unrealistic investor expectations for the sake of short-term earnings must be strictly controlled.

In addition, the FSS provided guidance on internal control considerations related to overseas investment. Key points covered: incorporating investor protection indicators into key performance indicators (KPIs); strengthening advance review of events and investment advertisements; systematizing the selection and management of overseas local brokers; rationalizing the process for calculating foreign currency deposit usage rates; and enhancing monitoring of excessive trading and heavy-loss accounts in overseas stocks.

Brokerage auditors said they would treat the period of heightened market volatility as an opportunity to strengthen internal controls and risk management capabilities, pledging to reinforce their own audit and inspection functions to prevent unsound sales practices that cause investor harm.

The FSS said it plans to continue supporting financial investment firms in strengthening their internal controls and risk management capabilities, and to expand communication and cooperation with the industry in the interest of market stability.

Stock and foreign exchange markets have been swinging sharply in recent sessions. According to Korea Exchange, the Kospi closed Wednesday at 7,730.82, down 366.11 points, or 4.52 percent, from the previous day. As losses deepened in the afternoon, a sell-side sidecar — a temporary suspension of program sell orders — was triggered on the Kospi market. That came just one day after a buy-side sidecar was triggered Tuesday when the Kospi surged, and two days after a sell-side sidecar was activated Monday. Sidecars were triggered on the Kospi for four consecutive trading days starting Friday.

The won weakened somewhat against the dollar but remained above the 1,500-won level. As of 3:30 p.m. Wednesday at the Seoul foreign exchange market, the won traded at 1,512.1 won per dollar, down 22.9 won from the previous session.


th5@heraldcorp.com