[2020 National Audit] Private Equity Fund Scandal Ignites Calls for Financial Supervisory Reform... Clear Differences in Views Between Financial Services Commission and Financial Supervisory Service

Yoon Seok-heon "Institutional Independence Must Be Guaranteed" VS Eun Sung-soo "Financial Supervisory Service Budget Audit Role Needed"

[Asia Economy Reporter Minji Lee] Amid growing interest in the restructuring of the financial supervisory system following the suspension of redemptions in private equity funds, the two heads of financial authorities have expressed differing opinions. Yoon Seok-heon, Governor of the Financial Supervisory Service (FSS), stated that institutional independence is necessary, while Eun Sung-soo, Chairman of the Financial Services Commission (FSC), said that oversight of the FSS budget is required.

At the comprehensive audit of the National Assembly's Political Affairs Committee on the 23rd, Governor Yoon responded to Rep. Song Jae-ho of the Democratic Party's criticism that "the FSS is not independent from the FSC" by saying, "In terms of budget, organization, and personnel, it is inevitable that we are subordinate to the FSC." He added, "It is difficult to immediately reflect market conditions in supervisory enforcement according to the FSS's will."

Eun Sung-soo, Chairman of the Financial Services Commission, attended the comprehensive audit of the Financial Services Commission and the Financial Supervisory Service at the Political Affairs Committee meeting held at the National Assembly on the 23rd, responding to questions from lawmakers. Photo by Yoon Dong-ju doso7@

Governor Yoon emphasized that institutional improvements to secure the FSS's independence must be made. He said, "Looking at overseas cases, the requirement for securing independence is budget independence, which is a very important issue," and stressed, "Since the FSS operates under the financial policy authority of the FSC, budget, organization, and personnel issues inevitably become subordinate."

However, Chairman Eun's stance was different. Eun said, "We have many discussions within the scope that does not infringe on independence," and added, "Just as the Ministry of Strategy and Finance oversees the Bank of Korea's budget, the FSS's budget and personnel must go through an approval process, so this is unrelated to institutional independence."

The FSC and FSS have been engaged in a 12-year power struggle over ambiguous authority since 2008. Previously, the Financial Policy Bureau of the Ministry of Finance and Economy handled financial policy, and the Financial Supervisory Commission was responsible for financial supervision. However, when the Lee Myung-bak administration established the FSC, it was tasked with overseeing both financial policy and supervisory functions. The FSC formulates financial industry and supervisory policies, while the FSS is entrusted with supervisory enforcement functions such as inspections and sanctions.

Regarding this, Governor Yoon criticized, "The FSC started with conflicting objective functions of fostering the financial industry and financial supervision," and said, "We believe the seeds of the problem were planted from the very beginning."

The two agencies also showed differing views on the causes and countermeasures of the Lime and Optimus scandals. The FSC focuses on re-examining parts missed during supervision through a full investigation of private equity funds, but while the FSS agrees, it does not hide its discomfort at being solely blamed.

There are claims that the FSC hastily avoids responsibility despite having significantly relaxed regulations to foster private equity funds, which allowed poorly managed firms to flood the market. In response, the FSS labor union issued a statement in June saying, "The successive private equity fund scandals are due to the FSC's reckless deregulation, including easing investment requirements, loosening approval conditions, and abolishing the fund screening system."