FSC, FSS dispute Justice Ministry over regulations

Tensions have been rising between the financial regulator and legal authorities regarding who is a more effective institution in overseeing the financial industries’ malpractices.

While the financial regulatory bodies are claiming that the initial investigation rights should be theirs, the legal department insists otherwise.

The JoongAng Ilbo has learned that the Ministry of Justice is pushing a plan that would divide the investigation rights on activities that disrupt the market between the Financial Services Commission and the Financial Supervisory Service.

According to the Ministry of Justice’s report on reforming the financial industry’s oversight system, an independent investigation vehicle established under the Prime Minister’s Office should have the initial right to investigate such activities.

The Justice Ministry’s assertion is based on a court ruling.

In January, the Seoul Central District Court, in ruling on stock manipulation by employees of Taihan Electric Wire and Deutsche Securities, stated that the FSS cannot be viewed as a special judicial authority and therefore the prosecution’s report based on the investigation from the FSS cannot be presented as evidence.

Currently, the FSS reserves the right to the initial investigations of possible market manipulations.

After the investigation from the FSS, the issue is handled by a capital market investigation and overview committee as well as the securities and futures commission under the FSC.

Once it goes through the committees, the financial regulators hand the case over to the prosecutors’ office.

When the court denies the investigation rights of FSS employees and dismisses the prosecution’s report, a major hole is created in the investigation process.

This hole could be easily mended once the prosecution appoints FSS employees with special judicial powers over investigations.

However, the financial regulators are expressing frustration as the FSS will be placed under direct orders by the prosecutors’ office.

Both sides are also clashing over implementing fines regarding malpractices in the market.

In the capital market legislation reform bill, it shows the FSC’s intention to secure punitive authority similar to that of the Fair Trade Commission.

“Financial investments are getting more complicated with the passing of time,” said Hong Young-man, a member of the FSC’s Securities & Futures Commission.

“And therefore, in many cases, it is difficult to impose criminal penalties by setting detailed regulations on various illegitimate acts in advance.”

Hong stressed that the adoption of a system that slaps penalties on illegitimate activities in the market that are not quite criminal activities is necessary.

The Justice Ministry is opposed to the financial regulator’s assertion, particularly regarding fines.

“Even if levying fines would be separate to the prosecution’s investigation, levying fines on activities including stock manipulation has the risk of undercutting the criminal penalty action,” said an official at the Justice Ministry.

The Justice Ministry is demanding the establishment of an independent investigation vehicle.

In its reform plan on the overseeing of the financial industry, the report claims that the recent savings banks corruption and insolvency problem was the result of an unfair balance of power given to the financial regulators.

It also noted that vital information on the investigations is easily leaked since members of the FSC’s Securities & Futures Commission, as well as the Capital Market Investigation Committee, are made up of civilians.

Therefore an independent investigation body should be established under either the Prime Minister’s Office or the FSC.

But the body in charge of the investigation should be the prosecution office, the report said.

The financial regulators are protesting that the prosecution’s intention is to expand its judicial limits.

“What the court ruling [in January] meant in denying the FSS investigation was that for the prosecutors to indict, it should not rely on the FSS and make its own independent study on the case,” an FSS official said.

“The prosecutors’ office is trying to twist the savings banks situation into an expansion of its authority.”

An FSC official said when investigating illegitimate activities that market expertise is the most essential.

“It is more rational to operate in a two-regulatory-body system where the financial regulators are guaranteed an investigation, and then the process passes to the legal department, instead of having the prosecutors’ office trying to control everything,” the official said.

By Yoon Chang-hee, Lee Ho-jeong [ojlee82@joongang.co.kr]