[Viewpoint] DLF Incident Should Be a Turning Point for Reflecting on the Essence of Financial Supervision

Jang Deok-jo, Professor at Sogang University School of Law

Recently, various discussions have emerged regarding the responsibility of supervisory authorities in relation to the Derivative Linked Fund (DLF) incident. However, the author believes that this case should serve as an important turning point for reforming the financial supervisory system. For nearly 20 years, our financial supervisory system has been restructured in a direction completely opposite to what academia has suggested. While academia has consistently advocated for reducing the size and authority of bureaucratic organizations, the bureaucratic organizations have instead continued to expand. Currently, South Korea has an integrated financial supervisory system where the Financial Services Commission (FSC) and its secretariat hold and exercise all authority over financial policy, financial regulation, and financial supervision. Moreover, the public official organization has been expanding steadily, growing from 19 members at its inception in April 1998 to over 300 today.

To briefly review the history of financial supervisory system reforms, the “Act on the Establishment of Financial Supervisory Agencies” was enacted in December 1997, based on which the Financial Supervisory Commission was established in April 1998. In January 1999, the Financial Supervisory Service (FSS) was launched to integrate financial supervisory tasks that had been dispersed across sectors such as banking, securities, insurance, and non-bank institutions. However, the main purpose of the reform at that time was to abolish bureaucratic finance, and thus the FSS was established as a special corporation rather than a government agency. In February 2008, the Financial Supervisory Commission was renamed the Financial Services Commission, and the FSC secretariat was newly established, with its staff numbers steadily increasing. Since then, without any substantial reform, debates have continued over whether to separate the Financial Consumer Protection Agency into a dual-peak structure. However, focusing solely on the dual-peak debate while ignoring the fundamental problems of South Korea’s financial supervisory system is not appropriate.

Even after the reform of the financial supervisory system, there have been incidents such as the 2003 credit card crisis, the 2008 currency option derivative product (KIKO) issue, the 2011 savings bank crisis, the 2013 Dongyang Securities case, the 2014 credit card customer information leak, the 2014 KB Financial Group incident, and the recent DLF incident. Looking at this series of events, one cannot help but seriously question whether our supervisory system is achieving its original purpose of renewing supervisory and inspection tasks to maintain sound credit order and protect financial consumers.

The current FSC, especially the public official organization that has expanded since 2008, directly contradicts the fundamental spirit of the 1997 reform aimed at eradicating bureaucratic finance. Furthermore, the UK, which was an important model for us in 1997, has since recognized many flaws in its laws and undertaken significant reforms. A major criticism was that the simplicity of integrated supervisory agencies was illusory, actually causing complexity and inefficiency in supervision, and that the UK failed to respond adequately to the financial crisis that struck in the 2000s after integration. In response, the UK pursued bold reforms, decentralizing authority by returning substantial financial supervisory powers to the Bank of England, the UK’s central bank, and promoting reforms that foster mutual checks and balances among supervisory agencies.

In addition to the bureaucratic remnants caused by bureaucratic finance, reform is required from the following perspectives. First, although the integrated supervisory agency holds monopolistic authority, there is no system to monitor and check it, necessitating consideration of enhancing the role of our central bank, the Bank of Korea, as part of this. Second, problems arise from the concentration of policy formulation and execution of supervision within the FSC. There is overlap in duties between the FSC secretariat and the FSS, which ultimately increases the workload of supervised institutions. The unclear division of responsibilities between the FSC and the FSS and the resulting dual structure also increase inefficiency.

Moreover, to secure the independence of the executor, the FSS, the FSC should not be allowed to intervene in its budget and personnel matters. If supervisory functions are separated into a dual-peak structure while maintaining the current authority of the FSC and its secretariat, it should be noted that South Korea’s financial supervisory system could become even more inefficient than before.

To avoid further confusion and financial crises, it is time to establish an advanced and progressive financial supervisory system, and the starting point must be a profound reflection on the fundamental problems of our financial supervisory system.

Jang Deok-jo, Professor, Sogang University School of Law