Enforce Reciprocally? Rules-Based Supervisory Approach and Collaborative Styles in Korean Financial Regulation

This paper aims to explore the changing features of risk-based supervisory regime in Korean financial regulation by focusing on regulatory exchanges at the frontline. Since its establishment in 1998, the Financial Supervisory Service of Korea (FSS) has acknowledged the global trend of risk-based supervision and strived to meet the needs for risk governance as a response to the changing environment of financial markets. While the implementation of this risk-based approach is confined to the nation’s stringent rules-based regulatory regime, the practice of supervisory activities develops as to allow conversation and persuasion over regulatory goals. Compared to a large volume of works on the financial supervisory system of Korea, however, research on regulatory practice at the frontline is missing in the current literature. This paper examines the blackbox of regulatory encounters between the regulator and the regulated, using a series of unstructured, in-depth interviews with frontline supervisors, professionals in regulated entities, labor union members and bureaucrats. 

Two works are conducted in this paper. First, I introduce the risk-based supervisory approach of FSS and how this institutional approach is implemented. Because government interference with private affairs should be founded on written legal documents in the strong rules-based regime, FSS’s frontline supervisors are given little room for harnessing methods that are responsive to the firms’ motivations and receptiveness. Inducing rule compliance and better risk management outcomes are two, separate regulatory goals that are not always in concord. And the former takes priority over the latter in this rules-based, risk management regime. Second, I analyze FSS’s On-site Supervisor Program through the lens of reciprocity. This program is to assign one or two frontline supervisors stay at a high-risk institution for a certain period of time, with a view to minimizing the risk of otherwise upcoming prudential failure. On-site supervisors work closely with people in the financial firm, not just liaising the regulatory relationships but also actively preventing moral hazards and financial accidents committed by insiders, and even seeking a way of rehabilitating the firm. Various forms of reciprocity are harnessed as the firm’s risk profile and compliance motivations vary. I argue that the risk-supervisory prudential regime in Korea is in a transition from a top-down prescriptive one to a more collaborative form of responsive regulation.