[Chodong Perspective] Will Establishing a New Financial Supervisory Commission Clearly Separate Policy and Supervision?

June 27 Loan Restrictions... The Blurred Line Between Policy and Supervision
Organizational Reform Aims to Separate Policy and Supervision
If Separated, Clear Lines of Responsibility Must Be Drawn

"This is the person responsible. The one who devised the recent real estate loan restriction measures. Well done."

This was the public praise given by President Lee Jaemyung to the Secretary General of the Financial Services Commission (FSC) during the "Listening to Chungcheong, Chungcheong Town Hall Meeting" held at the Daejeon Convention Center in Yuseong-gu, Daejeon, on July 4. The specific policy mentioned by President Lee was the household debt management plan announced by the FSC on June 27. Here is a question: Was the President praising the FSC's policy itself, or was he commending the effective supervision and management by financial authorities to prevent illicit lending practices?

The reason I ask is due to the recent draft for a reorganization of financial authorities prepared by the National Policy Planning Committee. The Committee is currently reviewing a reorganization of the financial authorities in conjunction with the separation of the budget function from the Ministry of Economy and Finance. The draft reportedly includes a plan to transfer the FSC’s domestic financial policy functions to the Ministry of Economy and Finance and to revive the Financial Supervisory Commission, which was established in 1999. The focus is on separating financial policy from supervisory functions.

Financial policy involves creating systems through laws and enforcement decrees. Supervision, as the name suggests, refers to overseeing and managing financial institutions to ensure these systems are properly implemented. Currently, the FSC holds both authorities. Strictly speaking, the FSC formulates policy and delegates administrative authority to the Financial Supervisory Service, a private institution, to handle supervision. In practice, the FSC exercises control from policy formulation to system implementation.

Although the National Policy Planning Committee has stated its intention to separate policy from supervision, the problem is that the boundary between the two is becoming increasingly blurred. Consider issues such as equity-linked securities (ELS) compensation, real estate project financing (PF), and virtual asset policy. The ELS compensation determined by financial authorities is closer to supervision. Real estate PF restructuring is a matter where the FSC establishes guidelines and enforces strict supervision. In the case of virtual assets, for which a new policy (the Virtual Asset User Protection Act) was recently created, the policy is meaningless without accompanying supervision. As the influence and complexity of the financial market grow, it becomes increasingly difficult to separate financial policy from supervisory functions.

Let me ask again: Are the loan restrictions mentioned by President Lee a matter of policy or supervision? Can we clearly distinguish between policy and supervision in the process where the FSC limits mortgage loans to 600 million won and banks are supervised to ensure compliance with these mortgage loan regulations? The answer is obvious to anyone: it is not easy to separate them. This is why there are voices opposing the organizational reform that seeks to divide financial policy and supervision.

Given the firm resolve of the National Policy Planning Committee, a government reorganization of ministries seems inevitable. If the decision is made to separate the policy and supervisory functions of financial authorities, then the lines of responsibility for each must also be clearly defined. If one believes that reviving the Financial Supervisory Commission alone will clarify the roles of financial policy and supervision, that is a serious misconception.

We have already experienced a situation in 2006 during the Lone Star "eat-and-run" controversy, where officials shifted responsibility among themselves. At that time, the financial authorities operated under a system of the Ministry of Finance and Economy (financial policy), the Financial Supervisory Commission (licensing and sanctions), and the Financial Supervisory Service (supervision). When the controversy erupted and the prosecution began its investigation, all three agencies were quick to deny responsibility.

Organizational reform must be approached with caution. If the decision is made to proceed, every detail must be thoroughly reviewed and the process must be completed properly. The Lee Jaemyung administration must avoid repeating the mistakes of the past. If the reorganization of the financial authorities becomes solely focused on separating policy and supervision, it will ultimately result in creating an organization that simply follows orders.