Hefty bonuses at financial companies
Published: 25 Jul. 2023, 20:14
Financial institutions have not broken their old bad habit of “privatizing profits and socializing losses,” which came under fire and scrutiny in the aftermath of the global financial crisis. The delinquency rate related to property-backed project financing (PF) has been soaring. The delinquency rate of PF loans has reached 16 percent for securities firms, causing instability in the market. Yet executives and employees in charge of the loans at some brokerage firms packed generous incentives.
The Financial Supervisory Service (FSS) discovered that 17 out of 22 securities companies subject to the Act on Corporate Governance of Financial Companies have not complied with the rule on their carried interest. Under the law, carried interest is paid according to long-term returns and the performance of underlying assets. Executives and staffers overseeing investment funds should receive 40 percent or more of their carried interest across three or more years. Although property-related projects can show business prospects many more years or a decade later, local brokerages paid bonuses in lump sum if the amount was set below 100 million won ($78,033).
As financial companies doled out bonuses based on short-term profits, executives and employees chased immediate rewards without taking into account all the risks of PF financing. The reckless incentive system could have fanned the PF instability. The crisis in the credit-wrapped bond market and trust companies resulting from short-term financing for corporate clients in return for high interests also stem from the greed of brokerages.
Last week, the FSS fixed an unfair business practice of insurers. Insurance policies for minors that should have been sold to children aged 15 or under were sold to people in their 20s and 30s. Insurers under the IFRS17 rule — a new rule of the International Financial Reporting Standard effective from this year — vied to sell children policies as products with long maturity as it served better for their accounting books. As the subscription age rose, coverage of adult diseases had to be added. The product apparently lost its service as a child policy.
Driver’s insurance offering to cover up to the age of 100 also neglected customers’ interest. Those aged over 80 who would have difficulty in driving will most likely be uncovered even while paying the premium. Life insurance which pays only after death was also sold as if it were a savings product. Before the financial watchdog interfered, insurers went on with practices detrimental to the capital health of insurers.
Financial authorities must keep its meddling to a minimum. But financial companies must not invite interference with their selfish practices. They should be self-reflecting and self-regulating so as not to lose consumer confidence.
The Financial Supervisory Service (FSS) discovered that 17 out of 22 securities companies subject to the Act on Corporate Governance of Financial Companies have not complied with the rule on their carried interest. Under the law, carried interest is paid according to long-term returns and the performance of underlying assets. Executives and staffers overseeing investment funds should receive 40 percent or more of their carried interest across three or more years. Although property-related projects can show business prospects many more years or a decade later, local brokerages paid bonuses in lump sum if the amount was set below 100 million won ($78,033).
As financial companies doled out bonuses based on short-term profits, executives and employees chased immediate rewards without taking into account all the risks of PF financing. The reckless incentive system could have fanned the PF instability. The crisis in the credit-wrapped bond market and trust companies resulting from short-term financing for corporate clients in return for high interests also stem from the greed of brokerages.
Last week, the FSS fixed an unfair business practice of insurers. Insurance policies for minors that should have been sold to children aged 15 or under were sold to people in their 20s and 30s. Insurers under the IFRS17 rule — a new rule of the International Financial Reporting Standard effective from this year — vied to sell children policies as products with long maturity as it served better for their accounting books. As the subscription age rose, coverage of adult diseases had to be added. The product apparently lost its service as a child policy.
Driver’s insurance offering to cover up to the age of 100 also neglected customers’ interest. Those aged over 80 who would have difficulty in driving will most likely be uncovered even while paying the premium. Life insurance which pays only after death was also sold as if it were a savings product. Before the financial watchdog interfered, insurers went on with practices detrimental to the capital health of insurers.
Financial authorities must keep its meddling to a minimum. But financial companies must not invite interference with their selfish practices. They should be self-reflecting and self-regulating so as not to lose consumer confidence.
with the Korea JoongAng Daily
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