[Desk Column] Financial Supervision, Let's Utilize Private Experts

Jo Young-joo, Head of Capital Markets Department

The Financial Supervisory Service (FSS) is in turmoil. Financial scandals such as the Lime Asset Management incident and the Derivative-Linked Fund (DLF) crisis have occurred one after another, and criticism is mounting that the FSS failed to fulfill its role during these events. In particular, the FSS is deeply hurt by allegations that Kim, a team leader at the FSS, was involved in Lime’s corruption while dispatched to the Blue House, along with criticism that the FSS ignored the problems at Lime Asset Management and allowed the situation to worsen. As various controversies grow, calls for accountability from Yoon Seok-heon, the head of the FSS, are also emerging.

Only earlier this year did the FSS belatedly announce plans to strengthen inspections of high-risk financial products such as DLFs, hedge funds, and overseas real estate. While significantly reducing document-based inspections, they increased on-site inspections. Some securities firms and banks involved in the Lime and DLF incidents are undergoing inspections regarding internal control status, appropriateness of management, and whether proper information was provided to investors. They are also being checked to ensure due diligence was properly conducted for overseas real estate investments. Additionally, inspections are underway for departments handling various products such as trusts and bonds.

During this process, financial companies have voiced complaints. First, many say that the expertise of FSS inspectors is lacking. When internal FSS personnel are assigned to inspect new fields, their understanding of those areas is significantly low. Securities firm employees spend most of their time explaining things in detail during inspections. Although it takes a lot of time, the structure makes it difficult to accurately identify problems.

Another issue is the FSS’s lack of understanding of the market. Financial products inherently involve both opportunities and risks. It is common to accept corresponding risks for higher returns. However, some products are designed to bear significant risks despite not offering high returns. Due to inadequate regulations, investors sometimes find it difficult to obtain proper information. To recognize these problems, one must have a thorough understanding of market conditions. Only then can early warnings be issued and problems quickly corrected when detected.

These issues do not arise because FSS employees are negligent. They stem from flaws in the supervisory structure. The market changes rapidly, and financial products evolve daily. Financial companies, which must generate profits, continuously transform to adapt to changing environments. Sometimes they operate by exploiting loopholes in existing regulations, walking a fine line between legality and illegality. Accidents happen in this process. Financial authorities belatedly understand new product structures and identify problems?often after significant damage has already occurred.

The Lime incident is no different. Lime Asset Management was the largest hedge fund manager in Korea. It was once known as a so-called “skilled” manager that earned good returns. While other managers earned 5% returns, Lime Asset Management attracted attention by delivering over 10%. Naturally, investments poured in. Then, when losses occurred on one side, they began to cover them up by shifting funds from another. Financial authorities should have been tracking Lime from that point onward. They should have carefully examined how the money was being made. However, with the current supervisory methods, this is practically impossible. It is difficult to keep pace with the speed of market changes. Increasing inspection personnel indiscriminately to enhance supervisory capabilities is also not feasible.

So, how about utilizing private-sector personnel? The idea is to actively employ retired private experts in supervision. They could be affiliated in the form of committees or ombudsmen. Through them, FSS employees could continuously grasp market trends and immediately detect warning signs. Unreasonable regulations demanded by the private sector could also be resolved. It might not be impossible for the FSS to rise as a world-class supervisory authority.

This content was produced with the assistance of AI translation services.