Protecting financial consumers

Financial authorities are out to shut the stable door after the horse has bolted. The Financial Services Commission and Financial Supervisory Service jointly announced actions to better protect financial investors in the aftermath of the Tongyang Group meltdown. The actions include stronger regulations, supervision and market discipline in order to protect investors from corporate liquidity crises. Executives would be accountable for moral hazard even if they did not break any laws or regulations. The strong actions underscore the severity of damages suffered by investors over Tongyang Group’s woes.

About 20,000 individual investors bought about 2 trillion won ($1.9 billion) worth of commercial paper and bonds issued by Tongyang companies, which resulted in the biggest bond crisis since the Daewoo Group went down during the Asian economic crisis in the late 1990s. The social costs resulting from the investment losses will also be colossal. Other investors are at risk because there are many wobbly companies that are running their businesses on debt through the issuance of CPs and bonds. The rigorous actions are better late than never.

Financial authorities could have prevented or minimized losses if they implemented the regulations already on the books. Mystery shopping is one. A financial watchdog official can disguise himself as a client to examine sales of financial products at financial institutions. If the watchdog used the technique well, it could have prevented wrongful and illegal sales and the encouragement of investments in debt-ridden and insecure companies. The FSS has protested that it lacks enough staff for investigative field work.

Authorities will also strengthen much-delayed regulations on moneylenders and fixed trusts. Tongyang caused greater investor losses through abuses of its specified money trust and lending affiliates. Authorities also decided to toughen disclosure requirements on companies with large debt issues and financial transactions among affiliates.

The actions, however, did not specify protections for financial consumers. Financial authorities have been dragging their feet on a consumer financial protection law. Effective protection cannot be ensured if the consumer unit is left under the FSS.

The Tongyang crisis proves that investor losses can be reduced if authorities pay attention to ensure the rights of consumers. Authorities have been criticized for tending to the interests of the financial industry more than those of consumers. When it draws up a law on consumer protection, it should include an ombudsman system. The government also should review creating a credit rating system entirely on the liquidity status of a company without support and guarantees from its parent group.