It is increasingly clear that the Financial Supervisory Service had been well aware of the financial problems of embattled Tong Yang Group before they blew up recently. Evidence shows that the financial regulator failed to do its duty.

According to Rep. Kim Ki-shik of the main opposition Democratic Party, the FSS signed a memorandum of understanding with Tong Yang Securities in 2009 to prod the brokerage to reduce its holdings of commercial paper issued by other shaky group affiliates.

The brokerage held 726.5 billion won worth of CP issued by sister companies as of October 2008. The MOU called for it to reduce its CP assets by 250 billion won by December 2011. The MOU also required the brokerage to report progress to the FSS every three months.

The MOU is evidence that the FSS had clearly recognized at the time that the brokerage held an excessively large volume of risky assets. It signed the MOU to ensure that the brokerage took measures to protect investors.

But the securities company did not follow through on the MOU; it reduced its CP holdings by less than 13 billion won by the end of 2011.

Curiously, the FSS did not take any further action against the brokerage. Had the regulator put more pressure on it to observe the MOU, the Tong Yang Group crisis could have been less serious, if not avoided altogether.

In this regard, it is necessary to find out why FSS officials simply let the Tong Yang crisis unfold before their eyes. On Monday, People’s Solidarity for Participatory Democracy filed a petition with the Board of Audit and Inspection to investigate the FSS. The state audit agency should launch an inspection into the regulator.

It will have to question the FSS head as he was found to have met Tong Yang chairman Hyun Jae-hyun, his wife and the Tong Yang Securities president four times between June and September.

The BAI also needs to investigate the Financial Services Commission. According to Lee Hye-hoon, a member of the ruling Saenuri Party’s supreme council, the FSC came up with a regulation in April banning a chaebol-affiliated securities company from selling bonds and CP issued by sister firms with a credit rating below the investment grade.

But the FSC decided to put the regulation in place six months later, allowing Tong Yang Securities to sell more bonds and CP from group affiliates. Lee alleged that the regulator made the decision at Tong Yang’s request.