The Korean financial watchdog to phase out financial holding companies amid a recent conflict between KB Financial Group and Kookmin Bank

Updated: 2014-05-22 19:09

FSC to phase out holding firms

By Chung Ah-young

The financial watchdog will strengthen restrictions on the authority offinancial holding companies amid a recent conflict between KB Financial Group and Kookmin Bank. 
The Financial Services Commission (FSC) said it will announce a planto drastically reform the management system for the financial holdingcompanies next month.
This is part of its comprehensive measures to enhance competitivenessin the financial industry which was unveiled last November.
Under the plan, the FSC will restrict the authority of the heads of thefinancial holding companies to prevent them from influencingsubsidiaries.
Currently, the KB Financial-Kookmin Bank conflict seems to be a powerstruggle between the holding company and its bank over the change ofa computer system. In that process, the bank’s outside directorsfollowed the holding company’s decision.
The FSC said that wholly owned subsidiaries such as Kookmin Bankdon’t have to have outside directors. Instead, the holding companieswill have more responsibility for losses or any problems, while havingtheir authority reduced to create more transparency.
“A special case clause in the current law on financial holdingcompanies stipulates wholly owned subsidiaries don’t have to keepoutside directors. But many financial firms don’t follow it,” an FSCofficial said.
He said that the FSC will enforce this clause more strictly. Outsidedirectors of subsidiaries who hold a 100 percent share of the holdingcompanies end up representing the interests of the latter under thecurrent structure, which allows heads of the holding company toinfluence in appointments for affiliated companies.
“The goal of this reform plan is to reduce financial holding firms’influence and increase their responsibility. They are supposed toexercise their authority through channels such as management and riskmanagement committees,” the official said.
The measure is designed to prevent “unofficial” orders from the headsof holding companies through verbal instruction or by telephone, notthrough the official process requiring documents.
Since the local financial market turned to holding companymanagement about a decade ago, other financial institutions have alsosuffered from internal disputes with top executives of differentsubsidiaries struggling for power.
Woori Finance Holding, the nation’s first banking group which was setup in 2001, and Woori Bank clashed between 2008 and 2013 as theformer’s chairman, Lee Pal-seung, wielded his influence to restrict thebank president’s managerial rights.
Shinhan Financial Group and Shinhan Bank were also entangled in alegal battle over embezzlement and misappropriation of fundsaccusations in 2010.
Recently, Meritz Financial Group and Meritz Fire & Marine Insuranceargued over the group chairman’s attempt to control the insurance firmthrough Meritz Securities, leading to the resignation of the insurancefirm’s head as a protest.
Meanwhile, the Financial Consumer Agency (FICA) said it will file acomplaint with the prosecution against KB Financial Chairman LimYoung-rok and Kookmin Bank President Lee Kun-ho and the bank’soutside directors.
They are accused of allegedly misappropriating corporate funds in theirpower struggle over a project to change the computer system worth200 billion won.
The internal dispute erupted after Lee and the bank’s chief auditorJung Byung-ki who opposed the board of directors’ decision over thesystem change, which Lim is believed to have pushed, brought thecase to the Financial Supervisory Service. The bank filed a petition witha local court to negate the board’s decision.
“In the past, whenever new heads took office at financial firms,controversy arose over personal interests and expensive new projects,for example, spending billions of won to change the companies’signboards nationwide,” FICA head Cho Nam-hee said.
KB units have denied that the scandal is related to personal interests.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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