The administration and the National Assembly have begun in earnest to reform the nation’s top financial watchdog, to cut its long-held collusive ties with financial companies it supervises.

Assessing that the Financial Supervisory Service, hit by a series of corruption scandals involving its former and incumbent staff, cannot complete a self-purification drive, the Prime Minister’s Office is pushing for tougher reform of the FSS.

Addressing bribery scandals and its failure to prevent improprieties at savings banks, the embattled watchdog early this week announced a set of in-house reform measures. But it has failed to pacify public anger.

The centerpiece of the reform plan being devised by the Prime Minister’s Office, is to break the FSS’ monopoly on auditing authority of financial companies.

According to news reports, the PMO is considering relegating some supervisory power to independent accounting firms or semi-government agencies like the Korea Deposit Insurance Corp..

Another reform measure the administration is focusing on is banning officials retiring from the FSS, the Financial Services Commission, the Bank of Korea, and the Finance Ministry from joining financial companies for a certain period after leaving.

Rep. Cha Myung-jin from the ruling Grand National Party plans to submit a bill to the National Assembly to block retired officials from FSS and FSC from moving to financial companies to root out collusion in the financial sector.

It has been a behind-the-scenes practice of banks, securities and insurance companies to select those who worked at FSS, FSC or economy-related ministries as auditors or other key post holders.

Banking sources said the long-held practice has fostered collusive links between FSS officials and the financial companies they supervise.

About 30 banks, securities houses and insurance firms are scheduled to elect new auditors at shareholder meetings next month. But sources said few retired FSS officials are expected to get the lucrative positions in light of the current sweeping reform drive.

Apparently sensing the move, Lee Seok-geun, a former deputy FSS governor who was recently tapped as auditor of Shinhan Bank, offered to resign Friday. He said he made the decision “not to give burden” to the FSS and its staff.

Korean news media reported that the FSS is now facing its biggest crisis since it was established about 10 years ago through the merger of three supervisory organizations on banks, securities and insurance companies.

The current financial turmoil started after eight savings banks were suspended from operation due to their financial crunch early this year.

The withdrawal of money by major shareholders and employees before shutdown on advance knowledge angered the public and the FSS was criticized for its failure to properly supervise the troubled banks.

A series of arrest of FSS former and incumbent officials on bribery charges fueled public indignation, which led President Lee Myung-bak to make a rare visit to the FSS main office on Wednesday and rebuke the organization.

The prosecution plans to summon several former and incumbent FSS officials from next week to investigate allegations that they took bribes from the suspended savings banks.

On Monday, prosecutors had already arrested 10 major shareholders and executives of Busan Savings Bank, including chairman Park Yeon-ho. A total of 21 suspects withdrew 18.5 billion won ($17 million) of deposits from the lender after FSS hinted them that the second-tier bank will be suspended the next day, Feb. 17.

The FSS has suspended operations of eight savings banks since January after their capital strength deteriorated on reckless lending practices to the construction industry.

Five former and current FSS officials were charged with receiving bribes and extorting money from debt-ridden companies trying to get approval for capital increases.

By Cynthia J. Kim (cynthiak@heraldcorp.com)