Financial Supervisory Service to Promote Dispute Mediation for Private Equity Funds Based on 'Estimated Damage Amount' (Comprehensive)

Attempt to Mediate Disputes Over Unconfirmed Losses in Lime Fund
Based on Objective Loss Estimates and Sales Company Consent
Some Oppose Citing 'Disruption of Responsibility Balance'

[Asia Economy Reporter Kim Hyo-jin] 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, but in some cases, 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 material that it plans to proceed with post-settlement dispute mediation based on estimated losses, even if losses related to private equity fund investments are not yet 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 the return of investment principal (161.1 billion KRW) through contract cancellation dispute mediation, other private equity funds have not yet confirmed losses, causing delays in dispute mediation and increasing investor grievances.

The FSS plans to apply this policy when facts are confirmed through inspections of asset management companies or sales companies and when objective loss estimation is possible through asset due diligence completion. The method involves prioritizing compensation based on estimated loss amounts through mediation decisions and then conducting post-settlement adjustments for additional recoveries.

For prior compensation, confirmation of incomplete sales through on-site investigations such as three-party interviews, legal advice on the sales company’s liability and compensation ratio, etc., must precede. The FSS recommends sales companies to compensate using the post-settlement method through decisions by the Dispute Mediation Committee. Matters not brought before the Dispute Mediation Committee will be subject to voluntary adjustment between investors and sales companies.

An FSS official said, "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 method of prepaying estimated losses is based on the agreement of sales companies. Regarding this, FSS Governor Yoon Seok-heon stated at the National Assembly’s Political Affairs Committee audit yesterday, "Sales companies may also 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 amount, it will be difficult to recover the difference.

A financial investment industry official said, "Even if the sales company’s negligence is clearly present, this could result in monetary compensation exceeding that level," and pointed out, "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, saying, "I worry that the FSS’s policy might become unnecessary false hope for consumers who have suffered investment damages."

An FSS official explained regarding this policy, "The intention is to actively utilize the original function of the mediation system," and added, "We plan to investigate objective facts about the circumstances before and after product sales and, based on this, set standards to lead to an agreement."

The official further emphasized, "Since the Lime Fund dispute could continue for about 4 to 5 years, the idea is to resolve it within the framework of dispute mediation and to establish a new paradigm regarding the sale and post-management of financial investment products," and added, "This is a plan based on objective loss estimation feasibility and the consent of sales companies."

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