South Korea needs to toughen its stance on separating industrial and financial capital as part of its efforts to prevent business group owners from using banks and other financial affiliates as their private coffers, the head of the country's antitrust watchdog said Sunday.

Fair Trade Commission (FTC) Chairman Noh Dae-lae made the remarks, saying that such need is growing especially in the wake of allegations surrounding Tong Yang Group, which is accused of engaging in financial fraud and other illegal methods to secure money for its cash-strapped affiliates.

Five of the affiliates of the country's 38th-largest family-run conglomerate have been placed under court receivership after the firm defaulted on some 110 billion won ($102.7 million) worth of debts that were to mature on Sept. 30.

Financial authorities have begun an extensive probe into Tong Yang's key financial arms, including its brokerage unit, for alleged unfair trading and negligence of the owner family in the lead up to the default.

"The lesson that we have learned from the Tong Yang scandal is that we should strengthen the separation of financial and industrial capital," Noh told Yonhap in an interview. "For its part, the FTC is also reviewing ways to improve regulations in connection with the issue."

The government places some restrictions on industrial capital owning stakes in financial institutions in a bid to make it hard for business owners to take advantage of their financial affiliates as private coffers.

The rules were a little bit eased in 2009 in order to help improve the competitiveness of domestic financial companies through industrial capital, but the argument for toughening the rules has been gaining ground again recently.

"In order to prevent risks from spreading from one affiliate from another, it is necessary to improve the overall holding company system through which we should strengthen the mechanism to separate financial and industrial affiliates," Noh said.

"Of course, we need to have coordination and consultation with financial authorities and the National Assembly for that matter," he noted.

He also confirmed his stance on banning additional cross-shareholding investment, saying that the Tong Yang Group sandal is a case in point where such an investment scheme was used to help cash-strapped affiliates.

Cross-shareholding refers to a tactic frequently used by conglomerates or chaebol that enables a handful of the owner's family members to control the entire business group with small stakes through circular shareholding methods.

The FTC has been pushing to ban additional cross-shareholding sought by conglomerates. The corporate sector has argued that such a ban could stifle its business activities and also leave many companies vulnerable to take-over attempts by foreign capital. (Yonhap News)