"Estimate Loss Amount and Compensate Private Equity Funds," Sales Firms Oppose FSC Policy

Fund Dispute Mediation: Financial Supervisory Service Demands Advance Compensation Based on Estimated Damages Despite Need for Confirmed Losses
Sales Companies Protest... "Hard to Recover if Actual Loss Is Less Than Estimated"

[Asia Economy Reporters Kim Hyo-jin and Koo Eun-mo] Financial supervisory authorities have decided to attempt dispute mediation based on estimated losses even for private equity funds whose losses have not yet been confirmed. Normally, compensation is possible only after losses are confirmed through redemption or liquidation of the fund, but this process will be bypassed. Sales companies are strongly opposing this, arguing that it could undermine the balance of responsibility for negligence.

On the 14th, the Financial Supervisory Service (FSS) announced in a press reference that it plans to proceed with post-settlement dispute mediation based on loss estimation, even if losses related to private equity fund investments have not been confirmed.

The FSS’s policy could be applied immediately to victim relief procedures related to the Lime Fund. While the Lime Trade Finance Fund is undergoing return of the principal investment (161.1 billion KRW) through contract cancellation dispute mediation, other private equity funds have yet to confirm losses, delaying dispute mediation and increasing investor grievances.

The FSS plans to apply this policy when facts are verified through inspections of asset management companies or sales companies and when objective loss estimation is possible through asset due diligence completion. Compensation will be prioritized based on estimated losses through mediation decisions, with additional recoveries settled afterward.

For advance compensation, confirmation of incomplete sales through on-site investigations such as three-party interviews, legal advice on sales companies’ liability and compensation ratios will be prerequisites. The FSS recommends sales companies to compensate through post-settlement methods based on dispute mediation committee decisions. Issues not brought before the dispute mediation committee will be resolved through voluntary adjustments between investors and sales companies.

An FSS official stated, "Among Lime Fund sales companies, those meeting the requirements for post-settlement dispute mediation will be selected and dispute mediation will be promoted sequentially."

A variable is that the advance payment of estimated losses requires agreement from sales companies. Regarding this, FSS Governor Yoon Seok-heon expressed at the National Assembly’s Political Affairs Committee audit yesterday that "sales companies may positively consider this from the perspective of customer protection."

Fund sales companies such as banks and securities firms oppose this policy, arguing that it is excessively skewed toward consumer protection. They are particularly concerned that if the final confirmed loss amount is less than the estimated loss, it will be difficult to recover the difference.

A financial investment industry official pointed out, "Even if the sales company’s negligence is clear, this could result in monetary compensation exceeding that level," adding, "The balance of responsibility for negligence, that is, the principle of proportionality, could be fundamentally undermined."

An official from a major commercial bank said, "Compensating for losses that have not been confirmed does not make logical sense," and added, "We need to first examine whether there are any legal issues." The official also expressed concern that "the FSS’s policy might cause unnecessary false hope to consumers who have suffered investment losses."

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