Other Funds Like Lime?…Growing Concerns Over Dispute Resolution in the Financial Sector

100% Compensation Adjustment Established, Heightened Attention on Impact to Other Dispute Mediation Cases
A Milestone in Dispute Mediation History, but Some Concern Over 'Bad Precedent'

[Asia Economy Reporter Kim Hyo-jin] Lime Asset Management's trade finance fund (Pluto TF-1) sellers have agreed to compensate '100% of the invested principal' for the first time in the history of financial investment product dispute mediation, drawing attention to the impact this may have on future dispute mediations involving other private equity funds. The financial sector is concerned that this case could set a precedent that imposes de facto 'unlimited liability' on sellers while excluding investor responsibility.

According to the financial sector on the 28th, dispute mediations by the Financial Supervisory Service (FSS) related to the sale of defective private equity funds, including other Lime funds, Optimus funds, German Heritage Derivative Linked Securities (DLS), Italian healthcare funds, Areumdri Asset Management funds, Discovery funds, Pop Funding funds, and overseas interest rate-linked Derivative Linked Funds (DLF), are expected to proceed one after another.

The FSS has estimated that the suspension of redemptions for 13 private equity funds sold by commercial banks amounts to approximately 1.3 trillion KRW. Depending on the results of a comprehensive inspection of 10,000 private equity funds to be conducted extensively by financial authorities centered on the FSS, the scale could increase further. So far, Woori Bank, Shinhan Bank, Hana Bank, and IBK Industrial Bank of Korea are involved in issues related to the suspension of redemptions amounting to about 1.34 trillion KRW.

What the financial sector is particularly focusing on is the recently noticeably strengthened government and financial authorities' stance on financial consumer protection, along with the FSS's efforts to significantly enhance the effectiveness of dispute mediation. The FSS's dispute mediation system is designed to help parties in conflict find a compromise to resolve the issue at an appropriate level without escalating to litigation.

Dispute mediation proposals must be accepted by both parties to be established. The FSS is pushing to change this principle by introducing 'unilateral binding force' for cases under 20 million KRW, whereby if the complainant, i.e., the consumer, expresses acceptance of the mediation proposal, the financial company must accept it unconditionally.

A representative from a commercial bank said, "Although large-scale cases like private equity funds may not be subject to this, the overall mediation stance could be redefined, so it cannot be taken lightly," adding, "The position that 'it must benefit the consumer first' could strongly influence the overall approach."

Amid Growing Calls for Financial Companies' Responsibility, Voices Pointing to 'Reduced Criticism of Supervisory Failures'

There are also critical voices that the responsibility of the FSS, which should manage the market to prevent disputes from occurring in the first place, may increasingly be suppressed.

A financial sector official who participated in the FSS's decision-making as an external advisor pointed out, "From a principled perspective, incidents like Lime could be seen as problems with the FSS's supervisory services and, more broadly, failures in the overall management by financial authorities," adding, "The recent atmosphere seems to make it somewhat difficult to raise such issues."

Regarding private equity funds, the financial sector has consistently pointed out that since the financial authorities significantly lowered market entry barriers in 2015, the number of asset managers without proper qualifications has increased substantially, and as general investors gained access to a market previously limited to professional investors, damages have grown.

Lime Trade Finance Fund Sellers Unanimously Accept Mediation Proposal on the 27th

Meanwhile, four sellers of the Lime trade finance fund?Woori Bank, Hana Bank, Shinhan Financial Investment, and Mirae Asset Daewoo?held board meetings simultaneously the previous day and accepted the FSS Dispute Mediation Committee's proposal, passed in June, to compensate the full amount of the invested principal.

Although the sellers maintain that there is room for legal debate regarding the mediation proposal, they decided to accept it on the grounds of the principle of financial consumer protection and management stability through resolving uncertainties. The sales amounts of the Lime trade finance fund are 65 billion KRW for Woori Bank, 36.4 billion KRW for Hana Bank, 42.5 billion KRW for Shinhan Financial Investment, and 9.1 billion KRW for Mirae Asset Daewoo.

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