Separating the Financial Consumer Protection Agency from the Financial Supervisory Service? "Not So Sure" [Economic Policy Zoom-In]

Reforming the financial supervisory system is more complex than it appears. It seems certain that the Lee Jaemyung administration will transfer the financial policy functions of the Financial Services Commission to the Ministry of Economy and Finance or the Ministry of Finance. If this happens, the structure overseeing financial supervision will revert to the Financial Supervisory Commission?Financial Supervisory Service system, as was the case during the Kim Daejung and Roh Moo-hyun administrations.

The ‘financial industry policy’ functions, such as the enactment and revision of financial-related laws, enforcement decrees, and enforcement rules, will be transferred to the Ministry of Economy and Finance or the Ministry of Finance. The ‘financial supervision policy’ functions, such as the enactment and revision of supervisory regulations for financial businesses and licensing authority, will be handled by the Financial Supervisory Commission. The ‘financial supervision enforcement’ function will continue to be handled by the Financial Supervisory Service, as it is now.

This change is in response to criticism that the Financial Services Commission has been performing both the accelerator role of ‘fostering the financial industry’ and the brake role of ‘financial supervision’ simultaneously, resulting in a single ministry handling two conflicting objectives.

There have also been cases where the appointment of separate heads for the Financial Services Commission and the Financial Supervisory Service led to clashes and market confusion. Additionally, when a key figure from the ruling administration was appointed as the head of the Financial Supervisory Service, the voice of the subordinate Financial Supervisory Service became disproportionately influential. For these reasons, it is expected that, as in the past, the roles of the head of the Financial Supervisory Commission and the head of the Financial Supervisory Service will be held by the same person.

Recently, as the issue of ‘financial consumer protection’ has gained prominence, there have been calls to separate the Financial Consumer Protection Bureau from within the Financial Supervisory Service and establish a Financial Consumer Protection Agency. The argument is that the Financial Supervisory Service faces conflicts of interest by handling both financial soundness supervision and financial consumer protection, which are fundamentally different tasks. In particular, since the bankruptcy of a financial institution or turmoil in the financial markets can have a major impact on the economy, there is a tendency for financial supervision to be prioritized over consumer protection.

However, there are very few cases worldwide where financial supervisory agencies and financial consumer protection agencies are separated. If they are separated, the two agencies may pursue different objectives and could present completely opposing views on certain financial issues. From the perspective of financial companies, having two supervisory agencies is akin to having two mothers-in-law. This is a direction that neither the Financial Supervisory Service nor financial companies desire.

The ‘twin peaks’ model, which distributes financial supervisory functions, has been adopted in countries such as Australia, the Netherlands, and Canada. Typically, one agency supervises banks and insurance companies, where prudential supervision is vital, while another agency oversees capital markets, including securities firms, accounting, and unfair trading. In Australia, for example, there is the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

The case of the United Kingdom is also worth noting. In 2012, the UK split its single financial supervisory agency, the Financial Services Authority (FSA), into two separate agencies. The Prudential Regulation Authority (PRA) oversees the soundness of financial companies, while the Financial Conduct Authority (FCA) is responsible for business conduct regulation and consumer protection.

However, recent assessments have been negative. On June 13, the UK House of Lords Financial Services Regulation Committee released a report titled “Growing Pains: Clarity and Culture Change Needed,” analyzing the reorganization of the financial supervisory system. The main point was that the twin peaks model leads to overlapping regulation. The committee stated, “With multiple agencies performing overlapping supervisory tasks, financial companies find it difficult to navigate,” and “the requirements imposed by each supervisory agency are often duplicative or contradictory, making it difficult for financial companies to operate.”

There was also criticism that overlapping tasks among supervisory authorities delay financial innovation and hinder industry growth. The committee specifically cited the UK’s open banking case. The report pointed out, “Overlapping regulations have hampered financial companies in developing new products,” and “innovation has been stifled.” Furthermore, after the FSA was split into the PRA and FCA, both agencies began to expand their respective domains in competition with each other. The committee explained, “The tendency for the PRA and FCA to expand their regulatory scope beyond their original mandates is growing stronger,” and “the burden on financial companies to respond to this is steadily increasing.”

Some argue that, for financial consumer protection, it is preferable to introduce the ‘unilateral binding effect’ system rather than separating supervisory agencies. The unilateral binding effect is a system in which, when a dispute arises between a financial company and a financial consumer, the consumer is granted favorable rights. If the dispute mediation committee of the financial authorities presents a settlement proposal and the financial consumer agrees, the financial company is required to accept the proposal unconditionally. Currently, both the financial consumer and the financial company must accept the proposal for it to be considered a ‘settlement’ in court. If either party does not accept, litigation is necessary. President Lee Jaemyung pledged this system in both of his presidential campaigns, and the Financial Supervisory Service recently reported plans to introduce the unilateral binding effect to the National Policy Planning Committee.