Leadership Gaps Stall South Korea’s Ambitious Financial Overhaul

The Lee Jae-myung administration’s sweeping organizational reforms across Korea’s financial and economic agencies have plunged into protracted and complex negotiations, putting the government’s ability to balance and define agency roles to the test.

As discussions drag on over redistributing responsibilities among key institutions like the Ministry of Economy and Finance, the Financial Services Commission (FSC), and the Financial Supervisory Service (FSS), progress in filling top leadership positions has stalled.

Despite Cabinet appointments across 19 ministries last Friday, nominations for the FSC chair and FSS governor remain in limbo.

Industry insiders speculate that these delays stem from deep-seated disagreements over the scope and structure of the proposed reforms.

The State Affairs Planning Committee disclosed on Sunday that it had submitted an initial draft of the reform plan to the president’s office on July 3.

Key proposals include divorcing the Ministry of Economy and Finance’s budget management from financial policy regulation and establishing a new Financial Supervisory Committee dedicated solely to oversight. This move aims to create a clear distinction between policymaking and supervisory functions, deemed crucial for effective oversight and financial system stability.

The plan also proposes spinning off the FSC’s financial consumer protection department into an independent agency focused exclusively on safeguarding consumer interests.

However, the FSS has voiced strong opposition to this move. Last week, senior FSS officials met with lawmakers, arguing that while bolstering consumer protection is vital, the organizational structure should remain within the FSS to ensure seamless coordination and clear accountability.

The FSS union further cautioned that splitting the consumer protection division could lead to fragmented oversight, potentially hampering swift responses to issues like mis-selling or systemic crises and blurring lines of responsibility during emergencies.

Amidst these ongoing debates, Bank of Korea Governor Rhee Chang-yong added a new dimension by publicly emphasizing the need to strengthen the central bank’s role in macrofinancial policy.

“The persistence of issues like household debt not decreasing for over a decade and problems with real estate project financing can be attributed to the fact that, although the government talked about macroprudential policies, they were not effectively enforced in practice,” Rhee stated during a press briefing following Thursday’s Monetary Policy Committee meeting.

The BOK is now exploring avenues to acquire key regulatory powers from the FSC and FSS, seeking to expand its mandate to include critical decision-making authority and exclusive inspection rights over both banks and non-banking financial institutions.

Specifically, it aims to transfer authority over credit, capital, liquidity regulation, and macroprudential tools—such as the debt service ratio and loan-to-value—from the FSC to the BOK’s Monetary Policy Committee.

Concerns are mounting that key policy issues are losing momentum amid the ongoing leadership vacuum and swirling speculation over the reform plan.

“Numerous financial agenda items, including addressing household debt, are in limbo while we await the appointment of new leaders,” revealed an official from a major financial group.

Last month’s scheduled announcement of preliminary approval for South Korea’s fourth internet-only bank has been postponed indefinitely. Meanwhile, the Virtual Asset Committee, tasked with discussing regulations for stablecoins, has been dormant since May due to the vacancy in the FSC deputy chairman position.

The reform is expected to increase the number of regulatory bodies that financial firms must report to and be audited by, raising concerns about further complicating the already complex regulatory landscape, the official added.