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

[Asia Economy Reporter Ji-hwan Park] 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 addresses issues pointed out as obstacles to market activation, such as existing performance fee funds being set at less than 50% of general fund fees. 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 such as introducing 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 performance fees. 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 performance fee structures in 2017. Currently, performance fee funds where asset management companies share part of the performance, such as Mirae Asset Dividend and Income 30 Performance Fee and Samsung EMP Global Rotation Performance Fee, are being sold. However, despite being launched over three years ago, the market size remains only about 20 billion KRW.

Kim Jeong-gak, Capital Market Policy Officer at the FSC, 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." He also noted the difficulty for distributors in calculating the asset management company's performance fees every time an investor redeems, as performance fees were calculated individually per investor.

Accordingly, the FSC decided to adopt a performance-linked management fee structure where management fees change in connection with fund performance. The performance-linked management fee structure adjusts fees based on excess returns or losses compared to a benchmark (management standard). If excess returns or losses occur 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, not only upon redemption. Performance is calculated at the fund level. Essentially, performance fees are paid by the fund itself, not differentially by investor.

In addition, the FSC will improve the asset management companies' 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 introduce incentives based on 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.

The public offering fund sales environment will also be aligned with investor interests. Sales fees will be decided by distributors, not asset management companies, to encourage fee competition. Currently, asset management companies set a single rate, and fees are paid from fund assets to distributors. The range of investor fee choices will be expanded. For all funds, online classes with lower sales fees and classes with upfront or no sales fees will be mandated.

A plan to expand direct fund sales ('direct sales') has also been prepared. Direct fund sales refer to a structure where asset management companies sell funds directly via mobile without going through securities firms or banks. Since distributors are bypassed, prices are relatively low. The FSC plans to accelerate the transition to online sales by revitalizing online investment advisory services and strengthening existing online channels. The plan also includes introducing an integrated online advisory platform (Koscom) to support advisory firms in expanding their advisory fund targets and back-office tasks (contract management, report generation, etc.).

Various public offering fund products will also be introduced. Money Market Funds (MMFs) invested and managed in foreign currencies such as OECD countries' currencies and Chinese yuan will be launched. Additionally, redemption-restricted funds that provide investors with periodic redemption opportunities within a certain proportion of fund assets will be introduced. The FSC also plans to encourage the launch of various ETF products, including allowing bond ETFs with maturities.

Investor support infrastructure will be strengthened as well. The Korea Financial Investment Association's fund disclosure information will be provided to distributors in a standardized data format to promote services for investors to compare and analyze funds. 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 through administrative guidance and industry voluntary initiatives.

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