Regulation abuse leads to financial system breakdown

Lately, credit card information leaks have shocked and infuriated many citizens, and countless regulations and bills have been proposed in order to prevent another leak of personal information. However, it is truly worrisome that the regulations and bills have been drafted without an understanding and philosophy of the financial system and policies.

What policy philosophy do we need when dealing with the financial system? I would like to sum up four policy philosophies. The first is regulations on financial health. They should be treated as strict regulations that cannot be compromised because the regulations on financial health are directly related to the healthiness of the Korean economy. Second are the regulations on the protection of credit information and transparent distribution of credit information. Sharing credit information and protecting it are not conflicting ideas, and the environment to share customer information should be based on protecting personal information.

Thirdly, Korea needs policies that guarantee market activities in a free-market environment and to reinforce the monitoring function of the market. For example, many specialists think punitive fines for credit information leaks are a positive thing, but such a regulation can reduce the monitoring function of the market and expand the government’s supervision. Financial firms are most afraid of their customers leaving the company for a competitor that manages credit information better and ending up unable to survive in the market. If the autonomous monitoring function of the market is reinforced, financial companies will do their best to survive in the market by catering to the consumers, i.e. customers, rather than the supervising authorities. Financial consumers are at the center of a respected market.

Korea is standing at an important crossroads to developing a credit-based society. We can build a healthy credit society when we establish the basic credit infrastructure where customers with good credit are highly regarded and customers who are late on payments can recover their credit if they work hard at it.

In short, we should be careful not to ruin the financial system by only focusing on the immediate trouble of the information leaks when creating new regulations.

By Lee Gun-hee, Professor at Sogang University’s business school