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Financial Services Industry
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보고서 1
Directions for Improvement in Internal Controls of Financial Firms [22-01]
Senior Research Fellow Lee, Hyo Seob and others / Jan. 27, 2022
Internal controls mean an internalized version of otherwise imperfect external controls that include supervision and regulations. Developed nations such as the US and UK have long facilitated financial firms to bolster their internal controls as part of their drive for ethical management and prevention of increasingly sophisticated financial crime. It was in 2017 when Korea promulgated the Act on Corporate Governance of Financial Companies (“Corporate Governance Act”, hereinafter) and mandated financial firms to comply with the law, manage their business soundly, and follow a set of standards and procedures (“internal control standards”, hereinafter) in carrying out their duties for protecting shareholders and other stakeholders. In the recent event of a mis-selling on the high risk financial products, we have the different perception on internal controls between regulatory authorities and financial firms.
 

The internal control and compliance program of U.S. securities firms developed based on the supervisor liability provisions under the Securities and Exchange Act and its related FINRA rules. Under the Securities and Exchange Act, supervisor responsibility only presents requirements for the exemption of supervisory responsibility, and this negative method requires securities companies to prove that they have established reasonable supervisory systems and procedures. For this reason, securities firms or CEOs have incentives to prepare and utilize reasonable and effective compliance programs for their defense against supervisory responsibility. FINRA regulations, self-regulatory forms, supplement the supervisor responsibility, presented only as an exemption clause, by specifically requiring a minimal operating system related to compliance program. While imposing high sanctions to reflect the high social cost and low possibility of detection of white-collar crimes, the U.S. has developed the programs reducing its sanctions for companies with compliance programs, voluntarily reporting, or cooperating with government investigations. Finally, U.S. regulatory features related to the internal control and compliance program emphasize 'reasonable' or 'reasonable level'

 
The UK has strengtened its internal control system since the global financial crisis. Both the FCA and PRA established the regulations about the duty of responsibility, which take enforcement action against Senior Managers if they are responsible for the management of any activities in their firm in relation to which their firm contravenes a regulatory requirement, and they do not take such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring or continuing. In connection with the regulations, the Financial Services Market Act includes the sanctions, which can be imposed not only on financial companies but also on individual high-level executives, in case of violations due to lack of internal control. Similar to the US, internal controls have functioned as a useful incentive―not as a tool for imposing penalties―that provides penalty reductions under the premise of strong supervisory responsibility. 
 
We provide some policy directions that are expected to give financial firms an incentive to exert self-effort for bolstering internal controls. First, CEOs and other supervisors should take stronger responsibility. Second, internal controls should serve as an incentive that enables penalty reductions, instead of being used for the purpose of imposing penalties. Third, the internal control duty should be governed not by law, but by self-regulation. Fourth, it is necessary to prepare internal control guidelines for each industry that financial companies can comply with at a reasonable level. Fifth, in order to induce financial companies to strengthen their internal control capabilities, we need to review a plan to disclose the main status of internal control through mandatory submission of internal control evaluation reports. 
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보고서 1
Discussion on Implementation of Mandatory Corporate Sustainability Reporting [21-01]
Senior Research Fellow Lee, Inhyung and others / Dec. 22, 2021
Listed companies that meet specific size criteria are obliged to disclose sustainability-related information, starting from 2025. This paper aims to provide a conceptual framework for discussing how the sustainability reporting is to be disclosed while at the same time introduce the current international discussions that are led by both the EU and the IFRS Foundation.
 
Sustainability reporting differs from traditional financial reporting in several key ways: For example, it has to deal explicitly with externalities firms cause and how they are incorporated back into the firm value over the short, medium and long-term period. In doing so, faced with a multitude of stakeholders, a firm also has to decide in a strategic manner which of those externalities are of material importance, setting priorities and action plans that can mitigate potential risks or enhance adaptability. This introduces a forward-looking and dynamic dimension to the decision-making process, which must be conveyed to the stakeholders through the sustainability disclosure.
 
The experience of the EU – three years of mandatory Non-Financial Reporting Directive (NFRD) - is introduced through the analysis of the progress assessment report and the proposed Corporate Sustainability Reporting Directive (CSRD). The proposed framework by the European Financial Reporting Advisory Group (EFRAG), with adherence to their principles, suggests three layers of reporting to promote comparability and relevance while covering three topics in the area of strategy, governance, and targets.
 
The newly created International Sustainability Standards Board (ISSB) under the IFRS Foundation is expected to review the prototype on the sustainability-related financial information disclosure standard suggested by the Technical Readiness Working Group (TRWG). The prototype aims to provide financial information related to sustainability issues faced by a firm, thereby making a distinction with the EFRAG framework, which upholds the double-materiality principle.
 
The international baseline framework for sustainability disclosure standard that the ISSB promotes is expected to be the basic anchoring framework that integrates financial information related to sustainability issues with the traditional financial statement. EU, which is the most significant economic block that adheres to the IFRS standard for its financial reporting, is expected to adopt the ISSB baseline framework. They share the Task Force on Climate-related Financial Disclosure (TCFD) and the Sustainability Accounting Standard Board (SASB) framework, and the principles applied are more or less the same as each other. However, the EU is likely to add additional standards that reflect their political agenda and ideology, which is already implemented through legislative acts such as EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR).

Implications of adopting the international baseline for domestic purposes are provided in the last chapter for domestic policy discussion and implementation. 
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보고서 1
Analysis on Robo-advisor Performance in Korea [21-05]
Research Fellow Lee, Sungbok / Dec. 06, 2021
It has been 5 years since robo-advisors were first introduced in Korea in 2016. As of the end of June 2021, the number of subscribers recorded a rapid increase over the past year and recorded 380,000, and the amount of managed assets continued to increase, but as of the end of June 2021, it was below 2 trillion won. However, since the COVID-19 pandemic was declared in early 2020, the number of investment advisory and discretionary robo-advisors increased significantly in line with the increase in individual participation in stock markets.
 
In Korea, unlike overseas, various types of robo-advisors have emerged and developed. Among them, product recommendation robo-advisors provided by banks record a high market share, while the investment advisory and discretionary robo-advisors of investment advisory companies have been making strides since the mid-2020. There are also many information-providing robo-advisors from securities companies that recommend listed stocks and provide trading timing information, while the size of the market is unknown.
 
As of the end of March 2021, there are 14 robo-advisory service providers that have passed the examination of the Robo-advisor Test Bed (RATB) and are currently providing services, whereas there are 31. This is because anyone can freely use the name of the robo-advisor, and if there is any human intervention, it does not fall under the ‘electronic investment advice device’ according to the Financial Investment Services and Capital Market Act, so it is implicitly accepted that it does not need to be reviewed by RATB.
 
In addition, although the product recommendation robo-advisor is almost identical to the investment advisory robo-advisor in terms of service content, it does not need to be reviewed by RATB and is not subject to investment advisory regulations. In addition, information-providing robo-advisors are not legally providing guidance, not advice, so that they are not subject to regulation on the sale of financial products or investment advice.
 
However, as the number of robo-advisor subscribers increases and the demand for robo-advisors continues to increase, financial consumers may misunderstand robo-advisors, which may lead to large-scale mis-selling and large-scale damage to financial consumers. In this regard, it is necessary to reorganize the robo-advisor regulation and supervision system based on the same conduct-same regulation principle.
 
Moreover, digital finance is now becoming a necessity, not an option. As such, the issue of selecting the most suitable robo-advisor for financial consumers is becoming more important than before. In particular, if there is a difference in asset management performance among robo-advisors, the financial consumer’s asset management performance may vary depending on the choice of robo-advisors.
 
As a result of empirically analyzing the asset management performance of robo-advisors based on the data provided by RATB as of the end of March 2021, the paper found that there is a clear gap in asset management performance across robo-advisors. In particular, among robo-advisors to be analyzed, robo-advisors that realize abnormal excess returns, follow market returns well, and show good rebalancing performance are not observed. Of course, among robo-advisors, even if the rebalancing performance is low or insignificant, there are some robo-advisors that can realize an abnormal excess return while tracking the market return at a very low level. Some robo-advisors with relatively good rebalancing performance are also observed.
 
Considering that there is a clear gap in asset management performance across robo-advisors, it is necessary to improve the robo-advisor disclosure system so that financial consumers can easily inquire and compare them to make the right choice for them. Furthermore, it seems necessary to strengthen the regulation on the obligation to explain the robo-advisor algorithm as in other countries and to thoroughly check the problem of conflicts of interest by robo-advisors.
 
A policy is also needed to improve the asset management performance of robo-advisors. For example, there is a need for regulatory support so that robo-advisors can easily implement efficient diversification for financial consumers who invest in small amounts. For reference, in September 2021, the financial authorities announced a plan to introduce a fractional stock trading for overseas stocks in 2021 and for domestic stocks during the second half of 2021.
 
Finally, as a result of empirical analysis of the client acquiring performance of robo-advisors, it appears that the asset management performance does not necessarily lead to the client acquiring performance. In particular, in cases of the robo-advisory service provider being a brokerage company, it shows poor client acquiring performance compared to banks or investment advisory companies, despite its asset management performance not lagging behind. Considering this, securities companies are required to make efforts to significantly improve the service accessibility of their robo-advisors.
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보고서 1
Financial Services Industry Strategy in the Ear of Ultra-Low Interst Rates [21-04]
Senior Research Fellow Choi, Soon Young and others / Apr. 28, 2021
Financial Services Industry Strategy in the Era of Ultra-low Interest Rates

The major economies of the world have entered a stage of ultra-low interest rates. Since the 2008 Global Financial Crisis(GFC), long-term yields on government bonds of have fallen below 2%, with some European countries experiencing negative interest rates since the Eurozone Crisis. The same is true of major emerging countries as well, including Korea, whose 10 year government bond yields are at below 2%, and call rates at 0.5% in 2021.
For developed economies, the trend of falling interest rates began in the 1980s, as the decade of high inflation came to an end with stricter monetary policy. For major emerging economies, interest rates began to fall with the onset of the 1997 Asian Financial Crisis. That fact that the phenomenon of “lower for longer” interest rates is global in nature and expands a period of decades indicates that its root causes are also common globally and systematic in nature. The main culprits of low interest rates are falling potential growth rates, demographic changes, and expansionary monetary policy following major economic and financial crises. 
The implication of a prolonged low interest rate environment is significant both for the economies undergoing such changes as it is for the financial services sector. Lower yields on safe assets makes asset building more difficult, such as for retirement planning, which implies a greater burden on government to expand social safety nets. Also, without a means to increase yields on household portfolios, current and future consumption will necessarily decline, leading to lower household welfare. As such, the role of the financial services sector is critical in effectively providing financial products and services that can aid in the portfolio re-balancing of households as well as institutional investors such as pension funds.
This research aims to examine the impact of a prolonged low interest environment, particularly from the perspective of the financial services industry. From a theoretical view point, low interest rates lead to increasing value of risky assets, such as stocks. Also, levels of yields below a threshold can lead to behavioral changes by households toward higher risk taking. However, actual changes in asset prices, as well as investor behavior, need to take into account concurrent changes alongside interest rates. In addition, the realization of a “money move” requires the supply of appropriate financial products and services that are aligned with the risk-return appetite of investors. Also, trust in the financial services industry is an important factor in whether and to what degree “money moves” take place.
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