Financial Services Commission Announces Measures to Enhance Competitiveness of Public Offering Funds... Introduction of Performance-Linked Fees and Foreign Currency-Denominated MMFs

[Asia Economy Reporter Park Jihwan] The financial authorities are focusing on promoting the activation of 'performance fee funds,' which apply a performance fee system to public offering funds. They will additionally introduce a 'performance-linked management fee' type product that supplements the issues pointed out as obstacles to market activation, such as existing performance fee funds being charged less than 50% of the fees of general funds. Money Market Fund (MMF) products invested and managed in foreign currencies such as the US dollar will also be launched.

On the 31st, the Financial Services Commission announced measures to enhance the competitiveness of public offering funds based on these contents. The competitiveness enhancement measures by the FSC can be summarized as △ providing incentives for asset management companies' own capital investment and introducing performance-linked management fees △ revitalizing online sales △ diversifying products including the introduction of foreign currency-denominated MMFs △ and activating information provision for investors' fund selection.

First, the FSC plans to promote the activation of performance fee funds. Performance fee funds are structured so that when an investment product achieves returns above a certain level, the asset management company or distributor receives a predetermined percentage of the performance fee. Conversely, if the set level is not met or losses occur, no fees or only minimal fees are charged.

Previously, the FSC allowed public offering funds with a performance fee structure in 2017. Currently, performance fee funds such as Mirae Asset Dividend and Income 30 Performance Fee and Samsung EMP Global Rotation Performance Fee, where asset managers share part of the performance, are being sold. However, despite being launched over three years ago, the market size remains only about 20 billion KRW. An FSC official explained, "Existing performance fee funds could only set performance fees at less than 50% of the basic fee, and fees could only be collected upon fund redemption," adding, "Performance fees could not be received in case of losses." There was also difficulty for distributors because performance fees had to be calculated individually for each investor whenever they redeemed the fund.

Accordingly, the FSC decided to adopt a performance-linked management fee structure where management fees change in connection with fund performance. If there is excess profit or loss compared to the benchmark during a specific quarter, a certain percentage of the management performance is reflected in the fee rate for the next quarter. The biggest difference is that performance fees are paid based on the previous quarter's operating results rather than requiring redemption to receive performance fees. Performance is calculated at the fund level. Basically, performance fees are paid by the fund itself, not differentially by investor.

Along with this, the FSC will also improve the asset management company's fund seeding investment (own capital) system. The main points are to rationalize the burden on small asset management companies related to own capital investment and to introduce incentives according to investment scale. For small asset management companies with assets under custody of 1 trillion KRW or less, installment payments of investment funds will be allowed for up to five years. When investing 1% of own capital, the period for judging small funds for own capital investment funds will be extended from one year to two years after establishment.

A plan to expand direct sales ('jikpan') of funds has also been prepared. Direct sales of funds refer to a structure where asset management companies sell funds directly via mobile without going through securities firms or banks. Since there is no distributor, prices are relatively low. The FSC plans to accelerate the transition to online sales by revitalizing online investment advisory and strengthening existing online channel functions. Through the introduction of an integrated online advisory platform (Koscom), it plans to support advisory firms in expanding the funds they advise on and back-office tasks (contract management, report generation, etc.).

Various new public offering fund products will also be introduced. Money Market Funds (MMFs) invested and managed in foreign currencies such as those from OECD countries and China will be launched. Additionally, a redemption-restricted fund that provides investors with periodic redemption opportunities within a certain proportion of fund assets has been introduced. The FSC also plans to encourage the launch of various ETF products, including allowing bond-type ETFs with maturity.

Investor support infrastructure will also be strengthened. The Korea Financial Investment Association will provide standardized data-formatted fund disclosure information to distributors to support the activation of investor fund comparison and analysis services. Information such as average returns and return volatility of funds sold by each distributor will also be disclosed. Open-end funds will undergo liquidity stress tests at least once a year, and liquidity-related risk information will be reported to financial authorities.

The FSC plans to announce legislative proposals by April for legal amendments, and even before legal amendments, some tasks will be prioritized for implementation through administrative guidance and voluntary industry initiatives.

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