S. Korea bans lenders from selling high-risk private equity funds

2019.11.15 09:46:27 | 2019.11.15 09:47:01

FSC Chairman Eun Sung-soo. [Photo by Kim Jae-hoon]이미지 확대

FSC Chairman Eun Sung-soo. [Photo by Kim Jae-hoon]

Banks in South Korea will be banned from selling high-risk privately placed funds under tighter regulations newly introduced by the financial regulator to protect consumers from any improper sales of complex derivatives products that have lately caused massive losses to retail investors.

The Financial Services Commission and Financial Supervisory Service on Thursday unveiled new consumer protection measures including a ban on banks` sale of high-risk private equity funds or “complex products” whose financial structure is complex for investors to understand.

Under the stricter measures, banks will be banned from selling private equity funds structured with credit-tied securities, equity-linked securities, or credit default swaps and carry the risk of losing as much as 30 percent of principal.

The latest measure comes after retail investors have recently suffered huge losses from derivatives-linked funds with major foreign interest rates as underlying assets, and the financial authorities found some financial firms failed to warn them about the risk of massive loss from such products.

Banks will be allowed, however, to sell high-risk derivative-linked products through publicly placed funds that are under relatively strong investor protection measures already. Investors that wish to invest in high-degree private funds will be able to instead invest in a public fund of funds that invests 50 percent or more in private equity funds.

Retail investors’ minimum investment amount in a private fund will also go up from 100 million won ($85,477) to 300 million won. The minimum investment amount for funds with more than 200 percent leverage ratio will be raised from 300 million won to 500 million won.

Financial institutions will be required to come up with stronger internal control standard on the sale of financial products and executives will be held responsible for any consumer damages.

Eun Sung-soo, chairman of the FSC, said that the measure is to make clear who to claim responsibility when damages occur, and that ultimate responsibility should be taken by the chief executive.

By Choi Seung-jin, Jin Young-tae, and Lee Eun-joo

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