This is the fifth in a monthly series contributed by executive members of the Financial Supervisory Service to address key ongoing financial issues. ― Ed.

Joseph Alois Schumpeter is an economist well known for his emphasis on creative destruction and entrepreneurship for innovation. He said that the biggest obstacle of all to innovation is resistance from old institutions and practices. Indeed, bringing changes to age-old, deeply entrenched practices could be a more difficult task than thought ― as the old saying goes, “reform is harder than innovation.” Nonetheless, for Korea to take its financial industry to the next level, it is now time to overcome this resistance getting in the way of innovation.

The Korean government is currently pushing forward structural reforms in four major areas, namely the labor market, public sector, finance and education, in pursuit of a stronger economy and greater national competitiveness. Among them, financial reform is largely being sought in a way that addresses improper regulatory and supervisory practices, and changes the risk-averse behavior of the financial community.

This government-led reform drive also requires financial authorities to encourage fair business practices in the financial sector. In fact, the tasks of promoting reforms and a more level playing field are not in conflict, but in harmony with each other. More specifically, the success of financial reform very much depends on public trust and support, which apparently could be earned in the process of tackling improper business practices.

Over the years, the Financial Supervisory Service has taken continuous endeavors to replace outdated practices with new ones, but there still exist plenty of unreasonable and backward business practices in Korean financial markets that violate the rights of consumers. This makes it really hard for people to feel the actual effects of the reform. Against this backdrop, the FSS has decided to identify issues that need to be addressed and are directly related to financial transactions in daily lives, so that people can actually feel the benefits.

With the aim to tackle practices that infringe upon consumer rights or cause inconvenience, and bring outdated ones more in line with those in advanced countries, the FSS selected 20 reform tasks based on an analysis of consumer complaints received and through dialogues with financial consumers. Among them, the following three are expected to deliver the most tangible outcomes: phasing out paper passbooks, setting up a system that updates changes in customers’ addresses for all financial institutions at once and promoting a so-called corporate-school educational partnership.

First, the FSS plans to discontinue the issuance of paper passbooks and close many financial accounts that are left idle without any activity for years. The use of a passbook in financial transactions is already a bygone practice in advanced countries. Yet, given that Korean people are used to this convention, its issuance will be phased out gradually by 2017.

Also, the FSS intends to upgrade the financial account inquiry system and simplify the account closure process to help consumers identify and close unnecessary accounts held under their name more easily. If this reform task goes as planned with success, the 100-year-old practice will give way to passbook-free financial transactions within years from now. And tens of millions of accounts that are left unused for long will be closed to ensure more efficient and convenient transactions.

Second, the FSS seeks to establish a system that updates changes in customers’ addresses for all financial institutions at once. In Korea, many consumers often leave unchanged their address registered with financial companies when they move because of the inconvenience of having to contact each of them to update it. If the new system is created, however, many positive outcomes are expected, such as greater consumer convenience, a lower cost burden on financial companies and enhanced public trust.

Finally, the FSS plans to launch a corporate-school partnership project together with financial companies this autumn to expand financial education for young Koreans. Having recognized the importance of financial literacy education, the FSS has run various programs for elementary through high school students, such as on-site learning and field trips and lectures for youngsters, but these programs have fallen short of expectations and were one-sided in nature. Adding to that, the level of Korea’s financial education at school still lags behind that of advanced countries.

To address this issue, the new project will link each headquarters or branch of a financial company with a nearby elementary or middle school in the form of sisterhood for educational activities. If this project is successful, it is expected to help nurture the next generation of wise financial consumers and eventually contribute to the development of the financial industry in Korea.

“Money is coined liberty,” wrote Fyodor Dostoyevsky, the Russian author who spent his entire life in financial trouble. If we are to live free of financial problems in the age of capitalism, educating ourselves on finance is essential. Thus, financial literacy education should be incorporated into our school curriculum as it is in advanced countries, and we should start nurturing financially knowledgeable Koreans at the earliest possible chance.

The FSS will continue to act against improper practices in the financial markets, while being fully committed to the tasks of financial reform and consumer protection. Our efforts to drive out bad practices and foster good ones, however small they are, will unwittingly help make our financial markets healthier and stronger. 

By Kim Yong-woo

The writer is the senior director general of financial resolution department at the Financial Supervisory Service. The views reflected in the article are his own. He can be reached at kyw0619@fss.or.kr ― Ed.