Financial affiliates may lose parent group names

Major financial companies affiliated with big conglomerates like Samsung, Hanwha and Hyundai Motor will be banned from using their parent group name in their corporate titles if they keep on failing to abide by the capital requirements and risk management rules laid out by the financial authorities.

The move, due to be tested in July, is part of the financial authorities’ efforts to bring conglomerate financial affiliates under the same level of scrutiny as those of financial holdings groups.

The seven groups are Samsung, Hanwha, Lotte, Mirae Asset, Hyundai Motor, Kyobo Life Insurance and DB Group, the Financial Services Commission announced on Tuesday. All seven groups have two financial business segments - whether in banking, securities or insurance - with combined assets of 5 trillion won ($4.7 billion).

Upon the implementation of the rule, the seven corporations might face a higher capital reserve because the new regulation will take into account the risk and financial state of the group’s non-financial affiliates.

If they fail to meet the new requirement, the Financial Services Commission can enact four penalties: ordering the increase of capital, spreading risks, improving risk management system and banning transactions and investment in non-financial affiliates.

When a company fails to follow through with the order, the regulator is able to prohibit the unit from using parent company names like Samsung and Hanwha as their corporate titles. The Financial Services Commission can also require the group to have only one financial affiliate if a company ignores the initial demands of the regulator.

“This is the first time that such a regulation has been applied to the country’s financial sector,” said Lee Se-hoon, head of the financial group oversight division at the Financial Services Commission.

“We will consult with the industry until May before we reveal a finalized version in June,” he said.

The regulatory agency has devised a new assessment model to measure risk from other affiliates in the groups with the aim of incorporating non-financial affiliates into capital reserve calculations.

The financial regulator announced a plan to strengthen the screening process of major shareholders at financial institutions last month, a move that will likely affect Lee Jae-yong, the de facto leader of Samsung.

The new measure will require investors who hold significant influence and anybody affiliated with the top shareholder to take the “fit and proper test.”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]