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Navigating Korean Capital Markets: Key Regulatory Developments

2025.05.07

Korean financial regulators’ continued commitment to enhancing investor protection and fostering innovation within the established financial regime can be evidenced by the recent (i) move to expand financial statement review for companies seeking to be listed on the Korea Exchange (the “KRX”) and (ii) proposed amendments to the Financial Holding Companies Act and its Enforcement Decree easing, inter alia, fintech related limitations (the “Proposed Amendments”). 
 
 
1. Strengthened Financial Statement Review for IPO-bound Companies 
 
With rising concerns about the accuracy and reliability of the pre-IPO financial disclosures of certain listed companies of which experienced significant share price deterioration, the Securities and Futures Commission (the “SFC”), in conjunction with the Financial Supervisory Service (the “FSS”) and the Korean Institute of Certified Public Accountants (the “KICPA”), has stepped in to formally adopt a more stringent framework for the examination of financial statements submitted by companies seeking to be listed on the KRX. 
 
Under the current regulatory framework, the SFC (with the FSS and KICPA as implementing bodies) conducts selective financial statement reviews of companies preparing for listing on the KRX that meet certain criteria.  These reviews may be converted to full inspections if significant accounting irregularities are discovered.  Notably, if such reviews or inspections result in sanctions for gross negligence or worse, the listing application may be rejected. 
 
To increase the effectiveness of financial statement reviews, the KICPA will modify its existing sample selection methodology, which previously focused primarily on asset size.  The revised approach will incorporate an additional criterion of ‘accounting fraud risk assessment’.  This risk-based approach will be calculated by comparing a company’s key financial indicators (such as operating cash flow and ratio of non-operating assets) with those of companies previously found to have committed violations or demonstrated financial instability.  Companies assessed as having a high risk of accounting fraud will be subject to financial statement reviews or inspections. 
 
Under the rigorous review regime, the asset threshold for financial statement reviews and inspections conducted by the FSS is reduced from KRW 1 trillion to KRW 500 billion.  Consequently, the FSS will now exercise review jurisdiction over: 
 
<ul>
	<li>Entities submitting statutory business reports; and</li>
	<li>Non-submitting entities with assets equal to or exceeding KRW 500 billion.</li>
</ul>
 
Correspondingly, the KICPA will retain review jurisdiction over non-submitting entities with assets below the KRW 500 billion threshold.  This recalibration of jurisdictional parameters was deemed necessary in light of the anticipated increase in the KICPA’s review caseload resulting from the enhanced sample selection criteria. 
 
 
2. Amendments to the Financial Holding Companies Act and Enforcement Decree 
 
On April 14, 2025, the Financial Services Commission (the “FSC”) and FSS issued a pre-announcement of legislation regarding amendments to the Financial Holding Companies Act and its Enforcement Decree.  The Proposed Amendments will undergo a public comment period from April 14 to May 26, 2025.  Subsequently, they will proceed through governmental reviews and ultimately be submitted to the National Assembly for consideration. 
 
The Proposed Amendments address concerns that the current regulatory framework – particularly restrictions on investments and ownership – has impeded organic business development and synergy creation within financial groups.  The key terms of the Proposed Amendments as set forth in the press release of the FSC dated April 14, 2025 are as follows: 
 
<ul>
	<li>Financial Holding Companies’ Second-tier Subsidiaries to Manage Private Equity Funds (“PEFs”) 
	 
	Under the current Financial Holding Companies Act, second-tier subsidiaries (or son-ja-hwae-sa, in Korean) of financial holding companies are prohibited from controlling third-tier subsidiaries of financial holding companies (or, jeung-son-hwae-sa, in Korean), with exceptions for foreign-incorporated financial companies and companies closely related to financial business.  This restriction has created an operational challenge for asset management companies that are second-tier subsidiaries of financial holding companies, as they are unable to form and manage institutional PEFs as general partners, despite this being a core aspect of their business. 
	 
	The Proposed Amendments seek to relax these control regulations to allow second-tier subsidiaries to form and manage institutional PEFs as general partners.  Additionally, the Proposed Amendments will explicitly exempt subsidiaries of financial holding companies acting as general partners of institutional PEFs from shareholding obligations. 
	 </li>
	<li>Increased Investment in Fintech Companies 
	 
	Under the current Financial Holding Companies Act, financial holding companies face investment constraints, being permitted to acquire no more than 5% of another company’s shares unless such company qualifies as a subsidiary by virtue of the financial holding company maintaining at least 50% ownership.  This restrictive investment threshold has been widely recognized as an impediment to the formation and development of strategic alliances between financial holding companies and innovative fintech companies. 
	 
	The Proposed Amendments look to liberalize the investment parameters specifically applicable to fintech-oriented investments.  The revision contemplates elevating the maximum permissible investment threshold from 5% to 15% for companies that, while not qualifying as subsidiaries, are officially designated by the FSC as “fintech companies”.  This designation applies to companies that utilize information and communications technology or other digital technologies to contribute, or are expected to contribute, to the financial industry or financial consumers, and are engaged in businesses related to financial services or businesses necessary for the efficient performance of financial companies’ operations.  This tripling of the investment ceiling is expressly designed to afford financial holding companies substantially greater latitude in establishing, structuring, and maintaining strategic partnerships with fintech companies. 
	 </li>
	<li>Fintech Subsidiaries to Own Financial Companies 
	 
	The current Enforcement Decree of the Financial Holding Companies Act prevents fintech companies that are direct subsidiaries of financial holding companies from owning other subsidiaries (which would be second-tier subsidiaries of the financial holding company). 
	 
	The Proposed Amendments look to facilitate the provision of innovative financial services by allowing fintech subsidiaries of financial holding companies to own financial companies with related business operations, specifically investment advisory and discretionary investment businesses, as their subsidiaries. 
	 </li>
	<li>Streamlining of Intra-group Business Outsourcing Regulations 
	 
	The current Financial Holding Companies Act requires prior approval from financial authorities for outsourcing operations to subsidiaries of financial holding companies, a requirement that has been criticized as excessively restrictive and an impediment to prompt business outsourcing. 
	 
	The Proposed Amendments seek to simplify the reporting framework for business outsourcing to enhance synergies within financial holding company groups and enable more expeditious outsourcing arrangements.</li>
</ul>
 
 
These regulatory developments reflect the financial authorities’ balanced approach to market oversight and innovation facilitation.  The more rigorous financial statement review process for IPO-bound companies reinforces investor protection by enhancing the detection of accounting irregularities before companies enter the public markets.  Concurrently, the Proposed Amendments create a more flexible regulatory environment that enables financial holding companies to leverage their group structures more effectively and respond dynamically to evolving market conditions.

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