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[Editorial] Consumer protection

The global financial crisis in 2008 highlighted the need to tighten oversight of greedy financiers. At the same time, it also brought into the spotlight the importance of protecting financial consumers, as it was millions of individual households that bore the brunt of the devastating financial tsunami.

Hence advanced countries have taken measures to strengthen the protection of financial consumers. The United States, for instance, has established the Consumer Financial Protection Bureau, an independent organ mandated to “promote fairness and transparency for mortgages, credit cards and other consumer financial products and services.”

The United Kingdom plans to set up the Financial Conduct Authority by the end of next year to better regulate financial services firms, both retail and wholesale, and to maintain the integrity of the financial markets.

Korea has also been promoting the creation of an agency to protect financial consumers, although the main impetus came from a different crisis here ― the savings bank debacle that has been unfolding since January.

According to news reports, the Financial Services Commission has almost finalized a draft bill on creating the agency, which it submitted to senior officials for review on Wednesday. To cut a long story short, the draft is ill-conceived, to say the least.

The plan proposes, among other things, to place the new organ under the wing of the Financial Supervisory Service, while giving the authority to appoint its head and approve its budget to the FSC chairman.

This arrangement appears to reflect a power-sharing deal between the two regulatory bodies, which have reportedly been involved in a turf war over the management of the soon-to-be-established agency.

Yet this scheme does not make sense. In the first place, it is a bad idea to place the new agency under the jurisdiction of the FSS, given that the regulatory body is still widely distrusted by the public.

The FSS lost favor with the public when the prosecution’s investigation of the savings bank scandal laid bare the incestuous ties between its officials and executives of the suspended banks.

More than a dozen FSS officials have been indicted on charges of receiving bribes from the banks and allowing their executives to commit wrongdoings. They looked the other way when the controlling shareholders of these banks took out customers’ deposits for investment in property projects. As a result of their neglect of duty, numerous innocent depositors suffered losses as well as inconveniences and a huge amount of taxpayers’ money was used to repay deposits.

The FSS has since struggled to transform itself, but the public has not shaken off their suspicions about the integrity of its officials. Hence few would welcome the idea of entrusting the task of protecting financial consumers to the FSS.

A more important reason for opposing the FSC’s scheme concerns the concentration of regulatory power. One reason FSS officials could engage in corrupt practices was that there was no other regulatory agency that could keep them in check.

While the FSS is established under the FSC, the latter’s role is limited to setting financial policies, with the power to inspect and supervise financial companies left exclusively to the former. If the FSS is authorized to inspect and punish financial companies that fail to protect consumers, it would simply add to its unchallenged power.

Apparently mindful of this concentration of power, the FSC proposed to transfer the authority to impose penalties on financial companies from the FSS to itself. But the FSS flatly rejected this proposal. The trade union of the FSS denounced the FSC for attempting to deprive the FSS of its regulatory muscle.

The FSC’s idea to take over the authority to punish financial companies from the FSS is not a step in the right direction either. If it attempts to do so, it would simply face a determined backlash from the FSS.

The bottom line is that the planned financial consumer protection agency should not be placed under the FSC or the FSS. It should be created as an independent unit outside the influence of the two regulatory agencies. This would not only help it fulfill its mandate more effectively but allow it to act as a counterweight to them. The FSC should rewrite the bill from the ground up.
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