South Korea

Author: | Published: 30 Sep 2004
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General framework and conduct of business

What legislation governs authorization and regulation of banking activities in your jurisdiction? What has been the most significant regulatory issue in your jurisdiction?

The Bank Act is the main set of legislation regulating banking activities in Korea. The rules and regulations that supplement the Bank Act include:

  • the Enforcement Decree under the Bank Act;
  • the Regulation on Supervision of Banking Business;
  • the Detailed Rules on Supervision of Banking Business;
  • the Licensing Guideline on Banking Business; and
  • the Guideline on the Scope of Incidental Banking Businesses.

A bank is permitted to engage in certain additional business activities (that is, trust business, credit card business, and asset management and distribution business) other than banking business, in which case, the bank will also be subject to the laws and regulations governing this additional businesses (that is, the Trust Business Act, the Credit Specialty Financing Business Act and the Indirect Investment Asset Management Business Act).

Banking activities are also subject to the application of the laws (including any subordinate decrees, rules and regulations) regulating the financial industry as a whole such as:

  • the Act on Establishment of Financial Supervisory Organization;
  • the Act on Protection of Depositors;
  • the Foreign Exchange Transaction Act;
  • the Financial Holding Company Act;
  • the Act on Use and Protection of Credit Information;
  • the Act on Financial Transaction with Real Names and Privacy Protection; and
  • the Act on Improvement of Financial Industry Structure.

Also, the regulatory bodies of the Financial Supervisory Committee (FSC) and the Financial Supervisory Service (FSS) are authorized to issue rules and regulations governing banking activities to the extent authorized by relevant laws, enforcement decrees and enforcement rules.

Among the significant regulatory issues recently raised include:

  • allowing banks to expand business scope; and
  • the extent of allowing banks to delegate and outsource their businesses.

On the first issue, the financial supervisory authorities have responded positively to the expansion of a bank's scope of business by amending from time to time the Guideline on the Scope of Incidental Banking Businesses. With respect to the delegation/outsourcing issue, the FSS promulgated a regulation addressing the matter in 2000, although various outstanding issues concerning detailed aspects of the regulation remain.

What are the key activities for which authorization is required in your jurisdiction?

A bank licensed by the FSC may conduct: core banking business; incidental banking businesses; and certain additional businesses.

The core banking business activities consist of taking deposits and deposit instalments, issuing securities and various debt instruments, extending credit and discounting bills, and domestic foreign exchange transactions.

The incidental banking businesses are businesses incidental to the core banking business that are not subject to a separate licensing requirement unless otherwise required by other laws and regulations governing such businesses. There are 23 different types of incidental banking businesses enumerated under the Guideline on the Scope of Incidental Banking Businesses and they include: guarantee issuance and bill acceptance; sale, purchase and lending of trade bills and commercial bills; repo (that is, sale of bonds conditional upon repurchase); custodian business; factoring; derivatives transactions; brokerage and arranging merger and acquisition transactions; insurance sales agent business under the Insurance Business Act; and trust and servicing businesses related to asset-backed securities issued by an ABS SPC under the ABS Act or the Act on Securitization of Residential Mortgage.

The additional businesses refer to businesses other than the core banking business and incidental banking businesses that a bank is permitted to conduct upon obtaining the relevant approval or licence, if required, and they include trust business under the Trust Business Act, credit card business under the Specialized Credit Financial Business Act and asset management and distribution business under the Indirect Investment Asset Management Business Act. Also, under the Bank Act, a separate approval of the FSC for conducting any of the additional businesses is required.

What sanctions are available to the regulators in your jurisdiction when taking action against regulated bodies?

The Ministry of Finance and Economy, the FSC, the FSS, the Korea Deposit Insurance Company (KDIC) and the Bank of Korea hold the regulatory and/or supervisory authority over banks in Korea. The sanctioning authority is exercised by the FSC and the FSS. Banks and their individual officers and employees are all subject to sanctions.

Banks can be subject to the cancellation of their business licence; suspension of all, or a part of, business (as a whole or by each branch); closedown of a branch; discontinuation of, and warning on, illegal and unfair activities; an order to transfer a contract(s) with customers to another financial institution ; a request for management improvement; an institutional warning; an order for public disclosure of illegal activities; a request for improvement of business practice; and an order for correction.

Officers of a bank are subject to, among others, a warning, recommendation of dismissal and suspension of duty.

Employees of a bank are subject to, among others, dismissal and removal from employment, suspension of employment, salary reduction and a reprimand.

In addition to the above regulatory sanctions, banks and their officers and employees could also become subject to a criminal liability.

Does the regulatory regime for banking business in your jurisdiction include regulatory conduct of business rules governing the obligations of a bank to its customers?

The Regulation on Supervision of Banking Business provides for provisions protecting the interests of bank customers and the main terms are as follows:

Banks are required to have their standard form contract reviewed and approved by the FSS. If a bank wishes to draft a new standard form contract or amend the standard form contract, such standard form contract must be submitted to the FSS for its review and comment 10 days before the proposed effective date of such standard form contract.

Banks are prohibited from engaging in certain unsound business practices. There are 11 different types of unsound banking business practices, which include, among others: requiring a borrower to involuntarily deposit money when extending credit/loan to that borrower; requesting an officer or employee of the borrower to be held jointly and severally liable for the borrower's payment obligation; refraining from delivering deposit certificates to customers for purposes of restricting their deposit withdrawal; seeking a blanket kun-mortgage or kun-guarantee from a third party other than the borrower; and requesting a blank check from a borrower to secure the borrower's obligation.

Banks are required to disclose the terms and conditions of their financial products and/or transactions, and the Detailed Rules on Supervision of Banking Business list specific items to be disclosed.

Banks are required to set up and carry out internal policy for prevention of financial accidents, for which the Regulation on Supervision of Banking Business provides for detailed guidelines.

Supervisory requirements

Does the regulatory regime for banking business in your jurisdiction include regulatory capital requirements? If so, are these based on the Basel Accord and are these significant variations from the core Basel recommendation?

Banks are required to meet the capital adequacy requirement of the FSC. This requirement was made based on the capital adequacy accord reached by the Basel Committee of Banking Supervision and it does not have any significant variations from the core Basle recommendation. Banks are required to maintain a minimum (at least 8%) ratio of total capital (regulatory Tier I and Tier II capital, less any capital deductions) to risk-weight assets, as determined by a specific formula under the Detailed Rules on Supervision of Banking Business. The computation is based on the bank's consolidated financial statements prepared in accordance with Korean generally accepted accounting principles.

What effect will Basel II have on banking transactions in your jurisdiction?

It is expected that the introduction of Basel II into the Korean financial industry will cause the capital adequacy ratio of banks to drop. Financial regulators and banks are seeking ways to address this issue by, for instance, organizing a task force and seeking an analysis from an outside consulting firm.

In addition, it appears that the banking industry lacks the data and risk-management experience to adapt to Basel II and so preparation is required. Banks are seeking to establish appropriate IT systems for management of their operational risks as guided by the recommendation in Basel II.

Does the regime in your jurisdiction include the rules and operational and organizational requirements relating to internal controls and operational risk?

Under the Bank Act, banks are required to set up internal procedures and standards to be followed by their officers and employees for purposes of sound asset management and protection of depositors (the Internal Control Standards). The Internal Control Standards must address, among others: assignment of duties and responsibilities; organizational structure; management of operational risks and risks associated with asset management; procedures to be followed by employees when performing their duties; procedures upon which the compliance of the Internal Control Standards is checked; and procedures for dealing with officers and employees in violation of the Internal Control Standards.

Banks are also required to hire at least one compliance officers to be responsible for confirming compliance with the Internal Control Standards, investigating any violation of them and reporting the violation to the audit committee of the bank.

Does the regime in your jurisdiction include a requirement for controllers and major shareholders of regulated banking institutions to be approved by the supervisory authorities?

Under the Bank Act, the largest shareholder of a nationwide bank together with its specially related persons is generally prohibited from holding more than 10% (or, for a regional bank, 15%) of the outstanding voting shares of that bank. A person (together with its specially related persons) may acquire in excess of 10% (for a regional bank, 15%), 25% or 33% of a bank's outstanding voting shares with the approval of the FSC in each instance.

Further, under the Bank Act, a person (other than the government, KDIC and bank holding companies) mainly engaged in non-financial business may not hold more than 4% (in the case of a regional bank, 15%) of voting shares in a nationwide bank unless they obtain the approval of the FSC and agree not to exercise voting rights in respect of shares in excess of the above limit.

If the above limit is exceeded for any reason, voting rights will be restricted and the FSC may request the holder to dispose of the excess shares.

Investor protection scheme

Have there been any recent significant changes to insolvency legislation in your jurisdiction, or are any such changes proposed? Have they made/will they make the regime more or less borrower friendly?

The traditional insolvency laws in Korea are the Bankruptcy Act, the Corporate Reorganization Act and the Composition Act. While bankruptcy procedures under the Bankruptcy Act aim to liquidate entire assets of a debtor, all other insolvency procedures seek rehabilitation of debtors through, for instance, debt restructuring. Corporate reorganization and composition proceedings are procedures administered by a court and, in particular, in a corporate reorganization proceeding, a court-appointed receiver manages the business affairs of the debtor.

In February 2003, a draft bill of the Debtor Rehabilitation and Bankruptcy Act consolidating these three sets of laws was presented before the National Assembly and is still pending. Under the draft bill, insolvency proceedings are mainly divided into rehabilitation, liquidation and individual rehabilitation procedures. Under the proposed rehabilitation procedures, the existing composition procedures under the Composition Act are eliminated while the current corporate reorganization proceedings are maintained with some changes. Individual rehabilitation procedures under the draft bill provide for procedures promoting rehabilitation of individuals that have regular income without having to undergo bankruptcy proceedings.

In addition to the above traditional insolvency laws, effective as of September 15 2001, the Corporate Restructuring Promotion Act (the CRPA) (effective only until December 31 2005) was enacted. The purpose of the CRPA was to single out financially distressed companies that had a high possibility of rehabilitation and institute a rapid restructuring process, so as not to subject them to court supervision under the then existing traditional insolvency laws, which were inflexible and time-consuming. No court intervention is made with respect to proceedings under the CRPA; instead, the debt restructuring takes place by negotiation and agreement among certain eligible creditor financial institutions under the supervision of the FSC.

A new Act that applies only to the individual debtor, called the Rehabilitation of Individual Debtor Act, was enacted and will be effective from September 23 2004. The primary purpose of this Act is to provide a means for individuals, who are on the verge of personal bankruptcy but likely to earn wages or business income continuously in the future, to repay their debt obligations pursuant the individual rehabilitation procedures approved by the relevant count.

The recent changes to insolvency legislation reflect the intention to place the obligor under a rapid rehabilitation procedure and to provide the individual debtor with the opportunity to restructure its debt without liquidating its assets.

Does your jurisdiction operate a deposit protection or guarantee scheme protecting retail depositors from loss in the event of insolvency of an authorized bank?

Under the Act on Protection of Depositors, the KDIC was established to address situations where financial institutions are unable to make payment on deposit due to reasons such as bankruptcy.

When a customer deposits money with a financial institution eligible under the Act on Protection of Depositors, such as a bank (including a foreign bank branch), securities company, insurance company or merchant bank, they automatically become entitled to file an insurance claim with the KDIC. The financial institution is then required to pay the insurance premium on a quarterly basis to the KDIC in an amount not exceeding 0.5% of its total deposit balance each year. The current insurance premium is 0.025% of the net insurable deposit balance for each quarter. The KDIC, at the request of a depositor, is required to make the insurance payment upon the occurrence of: suspension of payment on deposits by the insured financial institution; suspension or cancellation of a business licence, liquidation or bankruptcy of the insured financial institution. The KDIC insures a maximum of W50 million ($44, 000) for each depositor for each financial institution.

Does your jurisdiction have an ombudsman scheme, arbitration scheme or similar scheme for the resolution of disputes between a bank and its retail customers other than through formal legal proceedings?

The FSS operates the financial dispute mediation committee to review and resolve financial disputes arising among financial institutions, their customers (for example, depositors) and other interested parties. The committee consists of one chairman and up to 30 members appointed by the FSS who meet certain eligibility criteria, such as attorneys and financial specialists.

A request for mediation can be submitted to the FSS by a financial institution, customer or any interested party. The FSS would then refer the request to the committee. Once accepted by the parties involved in a mediation proceeding, a mediation proposal made by the committee becomes as effective as an arbitration award in a court-administered arbitration proceeding.

Author biographies

Min Han

Kim & Chang

Min Han, a member of Kim & Chang, studied at Seoul National University (LLB 1981), the Judicial Research and Training Institute of the Supreme Court of Korea (1983) and Cornell Law School (LLM 1992). Throughout his career, he has focused on finance transactions, particularly those of a banking, project finance, asset-backed securitization and other structured finance nature. He has also advised on Korean insolvency laws and purchase of non-performing loans and real estate assets by foreign investors. He is a member of the Korean and New York Bar associations.


Min Ho Lee

Kim & Chang

Min Ho Lee, an attorney at Kim & Chang received a bachelor's degree in economics from Seoul National University (B.A, 1988). Later, he received his Masters in Business Administration from the Graduate School of Business Administration of Seoul National University (1990). Furthermore, he attended the Judicial Research and Training Institute of the Supreme Court of Korea (1997) and Columbia Law School (LLM, 2003). He has gained experience in the management consulting service division of Samil Accounting Corporation (1988-1990). Also, he practiced as a visiting attorney at Simpson, Thacher & Bartlett LLP (2003.9 - 2004.2). He is a current member of the Korean and California Bar Associations as well as the Korean Institute of Certified Public Accountants. He is fluent in both Korean and English.


Pil Kook Lee

Kim & Chang

Pil Kook Lee, an attorney at Kim & Chang, received a bachelor's degree from the University of Maryland (1994) and JD from the George Washington University National Law Center (1997). He has been a member of Kim & Chang since 1997 and has extensive experience in acquisition or establishment of financial institutions (securities companies, asset-management companies, banks) and advises on regulatory matters. He is a member of the American Bar Association and the Maryland State Bar Association. He is fluent both in English and in Korean.



Kim & Chang
Seyang Building
223 Naeja-dong, Jongno-gu
Seoul 110-720
Korea
Tel: +82 2 3703 1114
Fax: +82 2 737 9091
E-mail: lawkim@kimchang.com
Website: www.kimchang.com