Korea’s financial regulatory system is likely to undergo another major change next year as the government has decided to separate the consumer protection function of the Financial Supervisory Service and expand it into an independent agency.
The reform plan is intended to bolster protection for citizens and small firms as a series of financial scandals in recent years, including the savings bank debacle in 2011, showed that the nation’s regulatory system had much room for improvement in terms of consumer protection.
The proposal calls for giving the envisioned new agency almost the same regulatory power as that of the FSS. It will be authorized, if established as planned, to supervise financial companies on its own and punish those that cause harm to the consumer.
The plan was warmly received by consumer groups, as it would better protect citizens and small-time entrepreneurs from predatory practices of unethical financial companies.
Yet it faces opposition from financial institutions, which are worried that their regulatory burdens would double if the new consumer protection agency aggressively conducts inspections independently of the FSS.
To address this problem, the government plans to arrange for the two regulatory bodies to undertake inspections jointly except for cases where individual inspections are inevitable.
The plan, which was drawn up by the Financial Services Commission, a government agency in charge of setting financial policies, also faces criticism from analysts and opposition lawmakers.
They note that it fails to address other problems in the current financial regulatory system. For instance, it leaves intact the split in the jurisdiction over domestic and international finance.
Presently, the FSC has the authority to make policies on the domestic financial sector. But matters regarding international finance are handled by the Ministry of Strategy and Finance. The two functions need to be integrated.
The reform scheme also fails to tackle the incompatibility of the tasks carried out by the FSC. On one hand, the commission formulates policies aimed at promoting the growth of financial institutions.
But at the same time, it sets regulatory guidelines for the FSS to limit financial companies’ risk-taking and keep the financial system stable. Analysts suggest that the two policy functions need to be separated to avoid a conflict of interest.
While beefing up consumer protection is necessary, a more important task is to ensure that the government sets financial policies prudently. Many of the recent financial scandals stemmed from ill-conceived policies.
The savings bank fiasco, for example, was rooted in the imprudent decision to allow small community finance companies to engage in risky businesses.
