[Song Seungseop's Financial Light] Is the Financial Supervisory Service Not a Public Institution? ... Controversy Over 'Public Institution Designation'

Financial Prosecutors and Financial Supervisory Service on 'No-Capital Special Corporations'
Tracing Origins Back to IMF Crisis
Public Institution Designation Brings Strict Regulations

Finance is difficult. It is entangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Nevertheless, finance is important. To understand the philosophy of fund management and to consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these 'light' stories, which will light up the '불' of finance for you.

[Asia Economy Reporter Song Seungseop] The Financial Supervisory Service (FSS) is called the prosecutor of the financial sector. It performs 'public' duties such as inspection and supervision of financial institutions including banks, insurance companies, securities firms, and card companies, as well as protecting financial consumers. Through this, the FSS aims to establish a sound credit order and fair financial transaction practices.

FSS, a private organization performing public duties?

However, although the FSS performs public duties, it is not a public institution. Public institutions include public enterprises, quasi-governmental corporations, and other public institutions, but the FSS does not belong to any of these categories. As a result, there has been ongoing debate about the status of the FSS until recently. What exactly is the identity of the FSS, and why has its designation as a public institution caused controversy?

The FSS was established on January 2, 1999, as a 'capital-less special corporation.' As the name suggests, it is a special type of corporation without capital, but it is still a legitimate 'corporation' like a company or foundation. However, it differs in that it does not pursue profit-making activities and was created by the government. The budget for operating the organization is funded by supervisory fees paid by financial companies.

[Image source=Yonhap News]

However, the FSS's superior institution is the Financial Services Commission (FSC), which is one of the government ministries. The FSC is an administrative agency under the Prime Minister's Office, and all its internal staff are public officials. This contrasts with the FSS, which recruits new employees through open competitive exams and hires experienced staff like a general company. In summary, the FSS is a private organization that has the government agency FSC as its superior institution and performs public duties such as financial supervision, but it is not affiliated with the state.

The somewhat ambiguous and complex status of the FSS traces back to the 1997 foreign exchange crisis. At that time, the International Monetary Fund (IMF) demanded that Korea reform its financial system, one of which was the establishment of the FSS. Accordingly, in December 1997, the 'Act on the Establishment of Financial Supervisory Organizations' passed the National Assembly, and the FSS was created by merging the Bank Supervisory Authority, Securities Supervisory Authority, and Insurance Supervisory Authority.

At that time, the IMF insisted that the FSS be established as a capital-less special corporation. The reason was that if the FSS became a government public institution or ministry, there was concern that private financial companies would be subject to political influence, resulting in government-controlled finance. Although government officials at the time opposed placing financial supervision functions in a private organization and argued that there was no overseas precedent, the IMF's position prevailed.

Because of this structure, voices calling for the FSS to be designated as a public institution have never ceased whenever various problems arise. When internal organizational issues or negligence in management and supervision occur, calls for strict government control increase.

Becoming a public institution means strict government regulation

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, attending the 7th Public Institution Management Committee held at the Government Seoul Office in Jongno-gu, Seoul, in June 2019.
[Photo by Kim Hyun-min]

If the FSS is designated as a public institution, it will be subject to strengthened regulations in terms of organization, personnel, and budget. Currently, the budget and personnel are determined in consultation with the FSC, but if it becomes a public institution, it must undergo National Assembly review according to the law. Since the Board of Audit and Inspection has pointed out inefficient organizational management, the budget and personnel may need to be reorganized. It would also be subject to strict management by the Public Institution Management Committee under the Ministry of Strategy and Finance, like the Korea Deposit Insurance Corporation or the Korea Credit Guarantee Fund.

The FSS has been designated as a public institution before. It became an 'other public institution' in 2007 but was delisted in January 2009 after the global financial crisis due to concerns about its independence. Similar claims arose during the savings bank business suspension incident in 2011 and the Dongyang Group insolvency case in 2013, when the FSS was held responsible. In 2017, when the FSS was criticized for hiring irregularities and employee stock trading, Kim Dong-yeon, then Deputy Prime Minister and Minister of Strategy and Finance, who appeared at the National Assembly audit, said, "We will actively consider designating the FSS as a public institution," drawing attention.

On October 28 last year, members of the People's Solidarity for Participatory Democracy held a press conference requesting a public audit on the Financial Supervisory Service's inadequate supervision related to the Optimus fund fraud case in front of the Financial Supervisory Service in Yeouido, Seoul.
[Photo by Kang Jin-hyung]

The controversy continued this year as well. Criticism arose that the FSS failed to properly supervise the sales of Lime and Optimus, which caused a multi-trillion won redemption suspension last year. Moreover, allegations surfaced that an FSS employee received bribes from Kim Bong-hyun, former chairman of Star Mobility and the main culprit of the Lime incident, and leaked information, or that the FSS accepted bribes from Optimus and introduced financial sector personnel, which intensified these voices.

In conclusion, the FSS was not designated as a public institution this year either. The government confirms and announces public institutions annually under Article 6 of the 'Act on the Management of Public Institutions,' but the FSS was not included in the list of public institutions announced on the 29th of last month. It appears that the FSC opposed the designation of the FSS as a public institution to the Ministry of Strategy and Finance, and there were considerable objections that such designation would undermine the independence of the FSS.