Amid the worst crisis for the Financial Supervisory Service (FSS), in which it is accused of colluding with banks, feeding them inside information and accepting bribes to forestall inspections, the government is looking for a system to break out such a vicious cycle.
The government is proposing to ban former government officials and financial supervisors from serving as outside directors for savings banks once they retire from their state posts. In addition, close relatives of the major shareholders in savings bank would also be prohibited from becoming outside directors.
The Financial Services Commission (FSC) is looking to see the proposals, as revision to the Mutual Savings Bank Act, take effect this July.
Under the current law, retired officials who worked for the government, state-run institutions or the FSC for more than five years, as well as lawyers and certified public accountants with more than five years’ experience, are eligible to serve as outside directors for savings banks. However, the FSC wants to revise the law so that former public officials can no longer be allowed to take up these positions.
The FSC is planning to discuss the proposals with related government ministries, including the Ministry of Public Administration and Security. However, the FSC may wait for proposals from a recently formed task force launched by the Prime Minister’s Office to examine the savings banks controversy because it may propose similar measures.
The FSC will also focus on those who have special relationships with the major shareholders of savings banks. Under the current law, shareholders’ spouse or direct family members can’t be appointed as outside directors. The FSC is seeking to expand the range of candidates who would be disqualified, with an aim of preventing parachute appointments.
But it remains still uncertain whether these reforms will strengthen outside directors’ oversight, with some industry observers expressing skepticism.
FSS to Evaluate Performances on Annual Basis
The financial regulator is also looking for a system to evaluate the performances of its high-ranking officials on an annual basis as part of preventing the corruption.
“FSS Governor Kwon Hyouk-se is adhering to a policy where performances of high-ranking officials with a status above deputy governor would be evaluated on an annual basis,” said an FSS high-ranking official.
Officers with poor performances would not be guaranteed their full three-year contracts. Currently, there are 12 high-ranking officials who would be subject to the annual evaluations. Each official specializes in a different sector. Details about the evaluations and how they will work have not been released.
“The reform measure’s purpose is to end the guarantee of three-year terms,” the official said. The evaluations are one reform being discussed within the FSS aside from other reforms being mulled by a task force operated by the Prime Minister’s Office.
Once the system begins, it’s supposed to improve the performances of other FSS employees whose rank is below the deputy governor level.
The FSS is also trying to come up with a measure to give work to those who are soon to retire. Retiring officers could be hired to give lectures to FSS officials based on their experience, or could work as internal consultants or dispatched to local autonomous entities.
The FSS recently announced it would abolish a long-time tradition of its former officials going on to top auditing positions at local financial firms. For two years after retirement, former senior officials from the FSS and the FSC are not allowed to take jobs in sectors they supervised in the three years before they left their government posts. For example, FSS officials who worked in the bank supervision department will not be allowed to work at a bank.
However, FSS officials have sometimes taken advantage of loopholes in existing regulations by being transferred to departments that don’t have direct ties to financial supervision, such as human resources, consumer protection or other internal administrative posts.
Bureaucratic Fight over Investigative Powers
Tensions between financial regulators (FSC and FSS) and the central bank (Bank of Korea) over who has the exclusive right to investigate financial institutions have gradually been building up. The tensions have existed for more than two years.
The BOK insists on securing its own investigative powers to provide better insight into the economy that would help policy decisions. The FSS claims that handing over investigative rights to other organizations would only confuse the market.
FSC chairman Kim Seok-dong said that the exclusive investigative power over financial institutions held by the FSS has worked effectively and efficiently. He argued that the FSS’ investigative rights should not be changed.
A reform bill submitted to the National Assembly that allows the central bank to independently investigate banks and request non-banking institutions for data has been stalled.
In addition, another reform bill that requires the central bank to report details of investigations to the FSC is still waiting to be passed by the National Assembly.
Both bills would reduce the investigatory authority of the FSS and FSC, but expand their supervisory scope.
According to a report handed on May 9 to Grand National Party lawmaker Chung Ok-nim by the Korea Federation of Savings Banks, former FSS and BOK officials held several key positions in the 31 savings banks that were suspended between 2002 and 2011,
Among 10 banks that were suspended, eight former FSS officials and four BOK officials were working as auditors and chief executives or were major shareholders in the savings banks. “The fact that former FSS or BOK employees were working at one out of every three savings banks whose operations were suspended shows moral laxity,” Chung said.
FSS’s Severance Pay System to Be Revised
The FSS is at the center of the Busan Savings Bank scandal. The financial watchdog has recently been under heavy fire after former employees were allegedly involved in corruption and other illegal practices at troubled financial firms, particularly savings banks. And the disclosure that expelled FSS officials are eligible for full severance pay is also increasing criticism of the regulator.
Under previous regulations, FSS officials could be penalized for corruption when it came to their severance pay, but the rules were changed in November 2000. “Because severance pay is like a wage, restrictions on severance are in violation of the Labor Standards Act,” said a senior FSS official.
The FSS is legally a private-sector agency working for the government, and its severance policy is consequently different from that for public officials. As a result, 10 senior FSS officials who are currently being investigated by prosecutors or are on trial for corruption are eligible for full severance pay, even if they are convicted. Public officials only receive half of their severance pay if they are fired or imprisoned for corruption.
In response to the disclosure of full severance pay for FSS officials, the Board of Audit and Inspection of Korea and a task force set up by the Prime Minister’s Office to examine the FSS in the wake of the savings banks scandal are considering ways to change the regulation so corrupt FSS officials can be penalized in terms of severance pay if they are convicted.