Yoon Seok-hun (77), former head of the Financial Supervisory Service (FSS), was considered an outcast within the financial sector. Coming from an academic background, he was out of place in the finance ministry officialdom that filled high-ranking positions in the financial authorities. His strong sanctions against financial institutions due to issues like mis-selling of products led to significant backlash from the financial sector. Financial firms also sought connections in the political arena to apply pressure on Yoon. Despite the external pressure, the Moon Jae-in government did not lend substantial support to Yoon. Given that he clashed with banks and the Financial Services Commission, it is hardly surprising he was not viewed favorably by the Blue House.
Despite having a weak support base, there was a field he persistently pursued throughout his three-year term: consumer protection. Shortly after his appointment as head of the FSS, he led the re-investigation of the foreign exchange derivatives (KIKO) incident and recommended compensation for victims. When the inappropriate sales of the overseas interest-linked derivatives (DLF) surfaced, he held then Hana Financial Group Chair Ham Young-joo, who was the head of Hana Bank, and Son Tae-seung, the former head of Woori Financial Group, accountable and imposed heavy penalties. Yoon's decision to increase the number of deputy directors responsible for the financial consumer protection department within the FSS from one to two also helped expand the organization.
As the FSS took active measures, the atmosphere in society gradually changed. There has been a growing recognition that financial firms must protect their customers. Following the DLF incident, a consensus formed that financial firms should be held to a duty of suitability when selling products. This eventually led to the establishment of the Financial Consumer Protection Act in 2020. Yoon also strongly supported the enactment of the law as the head of the financial authorities. While opinions among FSS employees about Yoon's achievements are mixed, everyone agrees that he was "genuine about consumer protection."
Even after returning to a private life following his resignation as head of the FSS, Yoon continues to voice concerns about consumer protection. Whenever discussions arise regarding the financial supervisory system, he tends to reveal his perspectives. His long-standing philosophy is that to dispel issues surrounding consumer protection, the financial supervisory system must undergo reform. Yoon remarked, "Now is the time to discuss restructuring the financial supervisory organization, and we need a public-private institution like the Bank of Korea." His argument is to remove the governmental influence from the FSS and transform it into an independent private entity.
Ahead of the presidential election, with the Democratic Party of Korea contemplating a plan to separate the FSS, we heard Yoon’s thoughts at his home in Chuncheon, Gangwon Province, on the 14th. Below is a Q&A with Yoon.
—Recently, you argued at a seminar of the Banking Law Society that the FSS should transform into a 100% private institution.
"I believe there is a need for a public-private institution composed entirely of private personnel. In the past, our financial industry grew in size thanks to government nurturing policies. Finance can reach a level of growth where it can thrive independently without government assistance. At this point, supervision becomes crucial. Rather than having a government department oversee the sector, it is better for an independent public-private organization to ensure supervision, in order to maintain neutrality in financial supervision. A pertinent example is the model of the Bank of Korea. This is the shortcut to preserving neutrality in financial supervision."
—Is there a reason why the private sector should take charge of financial oversight?
"First is independence. Government organizations have a tendency to promote the financial industry. On one hand, financial authorities are loosen regulatory restrictions and support industries; on the other hand, they are creating and managing regulations, making it difficult to establish sound consumer protection measures. During the DLF crisis, the FSS demanded that 'banks should not be allowed to sell high-risk products,' but the Financial Services Commission opposed this. Second is expertise. In the United States, it is common for former employees of financial firms to enter regulatory bodies, contributing to the enhancement of supervisory expertise. While concerns about public-private collusion may arise, this can be mitigated by establishing a stringent internal control system within the authorities. When expertise is secured, regulatory independence from government influence gains strength. Advanced financial countries have established such systems."
—Although the FSS takes the form of a private corporation, it still carries the label of government oversight in its operations.
"When bureaucrats aligned with the ruling party occupy leadership positions, they cannot escape the framework of government oversight. The election of the Bank of Korea's governor serves as a commendable precedent. Scholars and individuals from within the Bank of Korea alternate assuming the role of governor. This has minimized parachuting controversies and secured a certain level of independent status."
—Ahead of the 6·3 presidential election, some within the Democratic Party of Korea are once again proposing a dual-institution model of separating the FSS.
"I have reflected on this for several days after seeing recent news. I believe the dual-institution model is the direction we should pursue. The dual-institution model entails two separate entities holding responsibilities for soundness supervision and consumer protection respectively. We must consider a new financial landscape. Digital finance has become the new normal. In particular, banks are strengthening their digital competitiveness in retail finance rather than corporate finance. Most issues arising in retail finance are related to consumer protection. Conversely, the digital innovation in corporate finance is happening within the capital markets. The significance of market oversight in preventing unfair transactions is increasing. Both consumer protection and the oversight of unfair transactions involve regulatory conduct. Since behavior regulation becomes crucial in this digital financial era, an institution dedicated to this is necessary, which should be taken on by a consumer protection-focused organization. An exemplary case of such an institution is the Financial Conduct Authority (FCA) in the UK."
—It seems challenging to completely separate soundness supervision from consumer protection duties.
"First, a division of responsibilities should be achieved through consultations between the two institutions. This involves clearly assigning the primary responsible agency for each type of regulation. Of course, there could be financial incidents where the responsibility is ambiguous. In such cases, we could establish a higher consultative body called the Financial Stability Council among the dual-institution models to facilitate prompt discussions. The UK did experience trial and error in the first one or two years after transitioning to a dual-institution model. We may hear disruptions during our transition, but it is a challenge we can adequately address."
During the interview, Yoon repeatedly emphasized the need for improved internal controls at banks. He believes that simply reforming the FSS will not completely prevent financial incidents. Yoon remarked, "If we include reunification of the Korean Peninsula in the performance indicators (KPI) for bank employees, reunification will happen the next day," adding, "Bank employees live and die by their KPIs, and if the weight of KPIs related to internal controls increases, financial incidents will also decrease."
—Financial incidents due to poor internal controls, such as hundreds of millions of won in inappropriate loans at Woori Bank and IBK Industrial Bank, continue to arise.
"I believe that the inappropriate loan issue will take time to resolve, but banks will find solutions on their own. The financial losses due to inappropriate loans will fall on the banks. Will shareholders sit idly by? If problems continue to emerge as they do now, shareholders will voice strong opinions, and management will pay closer attention to internal controls. It would be even better if we activate whistleblowing as in other countries. However, due to the nature of Korean sentiments, it is not easy to monitor and report colleagues. The culture of fostering warmth within organizations also needs to change. Consumer protection is a matter that deserves priority beyond inappropriate loans."
—Although the Financial Consumer Protection Act was created following the DLF incident, incidents related to consumer protection persist. There are also evaluations that internal controls at banks remain stagnant.
"As I mentioned earlier, increasing the weight of internal controls in banks' KPIs is a priority. For instance, if a product causes significant losses to consumers, mechanisms can be set up to impose disadvantages on the personnel responsible for selling that product. Currently, whether customers incur losses or not, the only goal is to sell as many products as possible. Starting this year, a responsibility structure chart will be implemented. This system clearly assigns responsibility for financial incidents to management, which I believe will help improve internal controls and consumer protection."
—If you have any innovations you hope for from banks, what would they be?
"Rather than quantitative growth, we should shift towards qualitative growth. Banks should increase stable collateral loans based on excellent personnel and low procurement costs to earn significant profits. They need to reflect on what services they provide to our society and economy. Although the proportion of loans to small and medium-sized enterprises is rising compared to the total loan assets, there are still shortcomings in terms of loan maturities and rejection rates compared to advanced countries. Additionally, funds are primarily supplied to sound corporations. We might consider reducing housing loan ratios to secure funds and create financial services that emerging companies or self-employed individuals desire. Moreover, we need to develop innovative digital services that will surprise customers. Banks must incentivize our society to create higher added value."
☞Yoon Seok-hun, former head of the Financial Supervisory Service
▲ Bachelor of Business Administration, Seoul National University ▲ Completed master's program at Santa Clara University, School of Business ▲ Ph.D. in Business Administration, Northwestern University ▲ Assistant Professor, McGill University, School of Business ▲ Senior Research Fellow, Korea Financial Research Institute ▲ Professor, Department of Finance and Financial Engineering, Hallym University ▲ President of the Korean Finance Association ▲ President of the Korean Financial Association ▲ Professor, Department of Finance, Soongsil University ▲ Visiting Professor, College of Business Administration, Seoul National University ▲ 13th head of the Financial Supervisory Service.