[Rhym Full Compensation Decision D-1] Financial Authorities Only Playing 'Ping-Pong' with Responsibility

Refusing to Admit Supervisory Failure
"The Primary Responsible Party is the Operator"

[Asia Economy Reporter Ji-hwan Park] Following the Derivative Linked Fund (DLF) and Lime Asset Management incidents, criticism is emerging that the recent consecutive financial accidents involving Optimus Asset Management are unfairly placing responsibility solely on asset managers and distributors. While it is appropriate that the primary responsibility for the financial accidents causing trillions of won in damages lies with the respective financial companies, financial authorities are also being pointed out as not free from blame due to failures in preventive measures and supervision.

In February, at a plenary session of the National Assembly’s Political Affairs Committee, Financial Supervisory Service (FSS) Governor Seok-heon Yoon was criticized by lawmakers after he answered a question about the main party responsible for Lime Asset Management’s large-scale redemption suspension by saying, "If I have to choose a short answer, it’s the asset manager." Regarding the responsibility of financial authorities, Governor Yoon stated, "The FSS also bears some fault, but we acted within the given conditions," adding, "The Financial Services Commission’s (FSC) regulatory easing was too rapid, and we failed to respond properly to that situation."

Recent announcements by financial authorities regarding Lime Fund measures have omitted their own responsibility. The measures overwhelmingly seem to shift investor protection duties onto asset managers and distributors. The Financial Services Commission’s 'Administrative Guidance Plan for Strengthening Supervision and Comprehensive Inspection of Private Funds,' released at the end of last month, includes provisions to strengthen distributors’ monitoring obligations over asset managers. Distributors are now obligated to regularly verify whether the actual fund management aligns with the investment strategy described in explanatory materials. Asset managers must provide distributors with information such as leverage ratios and asset allocation proportions within 20 business days after the last day of each quarter, and distributors must complete their operational inspections within 10 business days of receiving these materials.

A representative from a Lime Fund distributor explained, "It seems a system has been established that holds only financial institutions responsible for the incident and seeks solutions accordingly," adding, "The situation where distributors must rely on materials provided by asset managers, as before, is unlikely to change significantly." This points to a structure where distributors are tasked with inspections that should be conducted by supervisory authorities.

Last month, a heated responsibility dispute also erupted between financial authorities. The FSC argued that the FSS was largely at fault for lax supervision, while the FSS blamed the FSC’s deregulation of private funds. Son Byung-du, Vice Chairman of the FSC, stated at a joint meeting on comprehensive inspections of financial consumer damage on the 2nd of last month, "In the case of private funds, some asset managers neglected risk management or engaged in illegal activities during fund design and operation, and suspicions of incomplete sales by distributors continue to be raised." The root cause of the private fund insolvency crisis was pointed out to lie not in the system itself but in financial companies exploiting it and supervisory authorities’ lax oversight.

However, the FSS countered that the FSC’s excessive deregulation fueled the crisis. The FSC’s significant lowering of market entry barriers in 2015 led to a sharp increase in private fund managers lacking proper qualifications, and as general investors gained access to what was previously a professional investor market, damages grew. At that time, the National Office Financial Services Labor Union’s FSS branch sharply criticized, saying, "While mobilizing the Korea Deposit Insurance Corporation and Korea Securities Finance Corporation, which are completely unrelated to the private fund incident, the FSC is shirking responsibility." They did not hesitate to openly criticize FSC Chairman Eun Sung-soo as "shameless" and "reckless."

There are also voices claiming that financial authorities are not taking personnel responsibility for financial accidents. The FSS personnel management regulations stipulate disciplinary targets as those who "fail to fulfill their duties or are grossly negligent in performing their duties" and those who "as supervisors, fail to provide adequate supervision, resulting in accidents." However, to date, there have been virtually no disciplinary actions taken for financial accident responsibilities.

A financial industry insider stated, "It is appropriate that distributors bear responsibility for incomplete sales when financial accidents occur," but added, "However, financial authorities, who take an unlimited liability stance toward distributors, also need to show that they will bear some shared responsibility."

This content was produced with the assistance of AI translation services.