Independence of a financial supervisory organization and objectivity of financial supervisory affairs are the foremost elements in effective financial supervision. An independent financial supervisory organization refers to financial supervisory affairs being conducted autonomously, in absence of political or administrative interference. Objective financial supervisory affairs signify serving the supervisory purposes in accordance with financial supervisory policies that are separated from economic policies.

The Financial Supervisory Commission (FSC)/Financial Supervisory Service (FSS) in Korea have been frequently exposed to political influences by participating in government-ruling party consultations, attending hearings in the National Assembly, and submitting various information requested by the National Assembly. In particular, when politically sensitive issues arise, such as account back-tracking, the FSC/FSS inevitably becomes involved in the political confusion. The current legal framework and common practice of the administration makes it almost impossible for the FSC/FSS to independently carry out its financial supervisory affairs.

The Ministry of Finance and Economy (MOFE) possesses legislative power regarding economic policies, whereas the FSC/FSS sets forth policy parameters and performs supervisory functions. However, the blurry distinction between economic and financial supervisory policies makes it difficult for the FSC/FSS to coordinate financial supervisory affairs with the MOFE, and thus the FSC/FSS is not able to conduct efficient and objective financial supervision. As evidence to this, there were cases in the past in which financial supervisory policies tended to count as a part of macro-economic policies.

This paper will briefly describe the current financial supervisory structure in Korea, and attempt to identify the causes of the inefficiencies in its' financial supervision. It will also provide a broad comparison of the financial supervisory system in Korea to that of advanced countries and present the following guidelines for the reorganization of the financial supervisory system in Korea.

(1) The operating structure of a financial supervisory organization should be deemed more important than the organizational structure, regardless of whether it is a government organization. on the one hand, the operation of a financial supervisory organization is associated with public power in terms of serving and enforcing the rights and duties of the general public. on the other hand, the financial supervisory organization should have ample resources to ensure objectivity and professionalism. The government argues that a consolidated financial supervisory body should be a part of the government, providing systematic support for its independence and objectivity of supervision. However, civil associations argue against it and prefer it to be a non-governmental public organization with a proper governing structure. In either case, as long as it serves the same purpose, what remains as the most important factor is not whether the organization is identified governmental or not but achieving reconciliation between the two opposing views.

(2) The regulatory agencies, the MOFE and the FSC need to urgently re-allocate administrative powers to reconcile the policy conflicts between the two and perform timely financial supervision. It is advisable that the MOFE delegate broad financial supervisory authorities to the FSC but maintains the authorities of enactment and amendment of legislation to avoid the concentration of excessive supervisory power of the FSC and to hold each other in check.

(3) Unification of the FSC, a governmental organization, and the FSS, a private non-governmental organization, must be achieved so that the former can play a role as a decision-making board and the latter as an executive arm within a single framework of the financial supervisory system. Currently, three of nine FSC commissioners are selected from experts in private industries. It is recommended that at least half of FSC commissioners be composed of private experts in order to ensure the independence and objectivity of financial supervision.

(4) Regardless of the staffs' legal status in the financial supervisory organization, which is dependent on the juridical character of the organization, their responsibility should be equivalent to that of civil servants. If there exist obstacles to making the financial supervisory organization a governmental entity such as wage structure, number of personnel and the ladder system, the enactment of a special law could be considered to establish a special public organization with reasonable remuneration.

(5) The mechanism of the proper “check and balance” system can be employed among the financial supervisory authorities and the related organizations: the MOFE, the FSC/FSS, the BOK, and the KDIC. In so doing, not only statutory requirements, but also MOUs and other forms of official agreements can be utilized to institutionalize cooperative relationships. As a result, a tradition of mutual respect and cooperation can be established by facilitating an exchange of information.

(6) Currently, the KDIC oversees insured financial institutions and the Korea Asset Management Corporation (KAMCO) conducts the disposition of non-performing assets of financial institutions using public funds. It is advisable that the KDIC and KAMCO should be directly affiliated with the FSC and the MOFE, respectively.

(7) The rational allocation of supervisory authorities among the self-regulatory organizations (SROs) and public regulatory organizations is necessary for the self-regulatory mechanism to complement public regulation. It is also necessary to streamline the supervision of the consolidated Korea Exchange, which is currently supervised by the MOFE and the FSC, by giving sole responsibility to the FSC.

SROs with similar functions need to be consolidated in order to alleviate the burden of redundant supervision, clarify the responsibility of supervision and promote consistent and equitable supervision.

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