Branch Licence Perimeter After a Product Pivot
The Seoul branch of a Hong Kong securities firm holds an FSC investment brokerage (투자중개업) licence and an FX branch permission, but no dealing licence. In the past quarter it has (i) quoted two-way prices in offshore USD notes to 180 Korean retail clients and held inventory for two to three days before back-to-backing the trades to Hong Kong; (ii) marketed a 'model portfolio' service under which clients gave it discretion over KRW 200 million each; and (iii) hosted Seoul seminars promoting its Hong Kong affiliate's offshore fund, receiving 40% of the management fee, although the affiliate is not registered in Korea. It also runs an NDF book to hedge the branch's USD exposure. The branch manager says all activity is 'brokerage plus hedging' and asks compliance to sign off before an FSS inspection. Notional principal traded was KRW 12 billion.
1. Classify each of the three client-facing activities against the branch's licence perimeter. Which require a new FSC approval or registration, and why does 'back-to-back' not cure the dealing issue?
Read the worked answer
Apply a substance test: the licence follows the legal character of the client-facing transaction, not the internal hedge. (i) Quoting two-way prices and holding inventory means the branch buys and sells as principal, bears price risk and earns a spread. That is investment trading business (투자매매업), which needs FSC approval. Routing the other leg to Hong Kong is a hedge, not a brokerage service, so 'back-to-back' does not convert a principal trade into agency brokerage. (ii) A 'model portfolio' with client-by-client discretion is investment discretionary business (투자일임업), requiring registration, separate suitability checks and asset-management controls. It is not mere brokerage. (iii) Promoting an unregistered offshore fund in Seoul is investment solicitation. The branch cannot act as agent for an unregistered foreign fund, and the 40% fee share reinforces that it is soliciting rather than passively referring. NDF hedging of the branch's own USD book may be ancillary to its FX permission only if genuine and within that permission; client-facing NDFs or speculative positions would be outside. Conclusion: the branch needs two new permissions, and the fund activity should stop pending registration.
2. What cross-border, FX and fee-sharing problems arise from the offshore fund seminars, and what must the branch do with the 40% fee already received?
Read the worked answer
The seminars are Korean-territory solicitation of Korean investors for an offshore fund whose manager is not registered in Korea. The branch's brokerage licence does not authorise collective-investment solicitation or acting as an overseas fund's local marketer. The 40% fee share looks like compensation for unlicensed intermediation and creates a conflict: the branch is incentivised to push the product regardless of suitability. Cross-border remittances for fund subscriptions also engage FX reporting and the branch's FX permission; the branch must confirm the remittance channel and whether investor-level FX reports were made. The fee should not be booked as safe revenue until legal review. Immediate steps: stop the seminars and new subscriptions, preserve investor lists and marketing materials, assess rescission or compensation for affected investors, disclose the fee arrangement, self-report to the FSS, and consider disgorgement. Do not let the affiliate 'regularise' retroactively by describing the branch as a mere introducer if staff in Seoul actually recommended the fund.
3. The branch manager wants a compliance sign-off before the inspection. What should the compliance officer do in the first 10 days?
Read the worked answer
Do not sign a clean representation. First, issue a written stop-work instruction for the dealing, discretionary and fund-solicitation activities until licences or registrations are obtained. Second, document the licence analysis and the dates activity began. Third, escalate to the branch manager, regional legal/compliance and the local board or audit committee, recording any disagreement. Fourth, prepare a self-report to the FSS that is factual, identifies affected clients and notional amounts, and proposes remediation. Fifth, design client remediation: suspend new business, review suitability files, contact clients, and reserve for rescission or compensation. Sixth, appoint independent counsel or an independent reviewer to test the findings. A sign-off that conceals unlicensed activity would expose the compliance officer personally and worsen the supervisory outcome. The inspection response should distinguish resolved items from open items, with owners and deadlines.