[2020 National Audit] Aftermath of the Private Equity Fund Scandal... Is Financial Supervisory System Reform Gaining Momentum?

Financial Supervisory Service Separation Theory Rapidly Emerging

[Image source=Yonhap News]

[Asia Economy Reporters Jihwan Park and Minji Lee] Attention is focused on whether the financial supervisory system will undergo a major overhaul following the Lime and Optimus incidents, which caused a suspension of redemptions in private equity funds worth around 2 trillion won. Interest is growing as to whether the current financial supervisory system, divided between the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) since 2008, will be put under review for the first time in 12 years.

At the comprehensive audit of the FSC and FSS by the National Assembly’s Political Affairs Committee on the 23rd, the main issue, as expected, was the 'private equity fund' scandal. During the audit, intense scrutiny was directed at the financial supervisory failures related to the Lime and Optimus incidents that have recently shaken the political landscape, with strong calls for accountability directed at both the FSC and FSS. Earlier audits of the FSC and FSS also highlighted failures in private equity fund supervision and allegations of political involvement as major points of contention. Notably, the opposition party, the People Power Party, submitted a bill to the National Assembly the day before to introduce a special prosecutor to investigate the Lime and Optimus fund cases. The ruling party, the Democratic Party of Korea, maintains its opposition to the opposition’s proposal for a special prosecutor on the Lime and Optimus cases.

During the audit, attention was drawn to the fact that Lee Mo, a former administrative officer at the Blue House’s Civil Affairs Office initially identified as a key figure in the Optimus scandal, was summoned as a witness but ultimately did not appear. Seong Il-jong, a member of the People Power Party, criticized, "(Former administrative officer Lee) ignoring the National Assembly and failing to testify is an admission of many suspicions raised so far." Yoon Chang-hyun, also from the same party, said, "At the meeting with investors held at the Optimus Management office, there were investors who attended even while hospitalized due to illness," and demanded, "Considering the tears of the investors and to uncover the substantive truth, the witness is absolutely necessary."

Opposition lawmakers also plan to file perjury charges against Jung Young-chae, CEO of NH Investment & Securities. This is due to contradictory testimonies given at two standing committee hearings. Seong Il-jong, a member of the People Power Party, stated, "CEO Jung Young-chae said he was never asked by anyone during the product sales process, but contradictory testimony emerged at another standing committee audit," adding, "We will take legal action for false testimony."

Active discussions were also held regarding the direction of reforming the financial supervisory system. The current system, where the FSC is responsible for financial industry and supervisory policy formulation and the FSS handles inspection and enforcement functions, has been maintained since 2008. Previously, the Financial Policy Bureau of the Ministry of Strategy and Finance handled financial policy, and the Financial Supervisory Commission was responsible for supervision. Song Jae-ho, a member of the Democratic Party of Korea, pointed out, "The current status of the FSS is constrained as a 'nominally independent agency' because its budget and organizational operations are decided under the jurisdiction of the FSC," adding, "This has resulted in a reactive supervisory approach that investigates and supervises only after financial accidents or problems occur, along with a lack of expertise." He emphasized, "There seems to be a need for reform aimed at increasing autonomy and expertise in the FSS’s independent budget formulation and organizational management."

FSC Chairman Eun Sung-soo responded, "I believe someone should oversee and approve the FSS’s budget," and added, "The budget aspect is not related to the independence of the FSS." In response, FSS Governor Yoon Seok-heon said, "There is a mismatch between responsibility and authority and conditions," and stated, "Even when referring to overseas cases, the prerequisite for securing independence lies in the budget aspect."

This is not the first time discussions on reforming the supervisory system have taken place. Governor Yoon Seok-heon voiced the need for separation from the FSC in budget formulation and personnel authority to secure the FSS’s independence during last year’s national audit, but it ended without results. Without FSC approval, it is difficult to immediately expand personnel and budget even if needed, and the structure where supervisory tasks are executed according to FSC decisions limits timely responses when accidents occur. However, this time the situation is different. The private equity fund scandal, which has become a nationwide concern, has highlighted issues such as the FSS’s lack of personnel and inefficiency in the supervisory system, showing signs that related discussions will become more active.

Within the financial sector, there are calls for establishing a permanent monitoring system. The argument is that a system must be established to enable financial authorities to properly manage and supervise the market to prevent recurrence of consumer damage cases like this one. A financial industry official emphasized, "Although the term 'Fourth Industrial Revolution era' is often heard like a trend, the supervisory system does not seem to have changed much since before the 2000s," and stressed, "A system is needed to prevent accidents in advance or to detect risk signs."