Fix the financial watchdog firstThe primary role of the Financial Supervisory Service is consumer protection. When it was established in 1999, its purpose has been stated to “establish healthy credit order and fair financial practices” and “protect financial consumers such as depositors and investors.” Then its main work should be oversight to ensure consumer protection and pre-emptive actions in order to stave off risks and dangers from the market. But watching the spillover from the Tongyang Group liquidity crisis, we have to wonder if the FSS knows what it should be doing.
Tongyang Group’s liquidity woes have long been forewarned. If the FSS had read the clear signs and acted out, it could have greatly lessened the damage to investors. The FSS in 2009 ordered the Tongyang Group to scale back issuance of commercial papers (CP). The group also signed a memorandum vowing to follow FSS guidelines. But it nevertheless pumped out CPs without any restraint. Early this year, the FSS drew up an order barring Tongyang Securities from purchasing CPs and bonds issued by below-investment-grade affiliates of the group.
But the action was put off until Oct. 24. Even as Tongyang Group’s liquidity crisis raised alarm bells last month, FSS Governor Choi Soo-hyun advised investors against a bank run, ensuring investments at Tongyang Securities were safe.
According to an investigation by the JoongAng Ilbo, Tongyang Securities staff continued to market CPs and bonds of crisis-ridden Tongyang units as safe and high-return products instead of warning about their insecurities. They even lied to suspicious and anxious clients that Tongyang Securities will guarantee safety of the products. It was the duty of the FSS to keep watch on such unfair and unethical business practices and ban financial institutions from selling highly risky products.
The FSS already knew that the practices had been ongoing for a while. In August last year, the FSS discovered more than 1,000 cases of questionable marketing practices by Tongyang Securities and was conducting a review of the malpractice. If the FSS had acted faster, it would have prevented individual victims from the Tongyang insolvencies from snowballing to more than 50,000. We may have to consider fixing the financial watchdog first. The FSS is now labeled as an expert in ducking, dragging and being late in the day. It needs a serious makeover.