Optimus and Lime Allowed, but Discovery Not Allowed in 'Mistaken Contract Cancellation'

FSS "Reviewed but... Reasons Claiming Mistake Do Not Apply to Contract Cancellation"
Victims "Ignoring Consumer Protection... Full Principal Refund Required"

[Asia Economy Reporter Park Sun-mi] As the Financial Supervisory Service (FSS) recommended that IBK Industrial Bank of Korea compensate 40-80% of the investment losses from the Discovery Fund it sold, criticism is mounting among private fund victims who had expected a full principal refund based on "contract cancellation due to mistake." The FSS drew a clear line, stating that the situations of the Lime Trade Finance Fund, Optimus Fund?which had full principal refund decisions?and the current Discovery Fund are distinctly different.

According to financial authorities on the 26th, the FSS decided on a basic compensation ratio of 50% for the US Fintech Global Bond Fund (Global Bond Fund) and 45% for the US Fintech Real Estate Secured Debt Fund (Real Estate Secured Debt Fund) regarding liability for damages due to incomplete sales of the Discovery Fund referred to the Financial Dispute Mediation Committee (FDMC). Accordingly, it recommended applying compensation ratios of 64% and 60% respectively to two investors. It also announced recommendations to apply compensation ratios ranging from 40% to 80% to other affected investors.

The FDMC recognized liability for damages due to violations of the suitability principle and duty of explanation by sales staff when determining the basic compensation ratio for fund victims. The sales staff did not first confirm the investors’ risk profiles before the fund subscription was decided, then inaccurately recorded them as "aggressive investment type," and emphasized that the product was a safe one investing in U.S. bonds, while omitting explanations of related risk factors and the possibility of principal loss.

However, it firmly rejected the applicability of contract cancellation due to mistake, which would allow a full principal refund. This is a decision completely opposite to the Lime and Optimus funds, where contract cancellation due to mistake was applied and full principal refunds were ordered. Article 109 of the Civil Act on contract cancellation due to mistake allows cancellation if the seller failed to properly inform the buyer of important matters to the extent that the contract would not have been concluded otherwise.

An FDMC official stated, "We reviewed whether the Discovery Fund case falls under contract cancellation due to mistake as claimed by the victims, but judged that the reasons for claiming mistake were not important enough to cancel the contract."

"This is not a case of contract cancellation due to mistake"

He explained, "If the bonds underlying the returns do not actually exist and investors unknowingly subscribe to the product, or if the fund was already insolvent causing losses but this was concealed and sold fraudulently, then contract cancellation due to mistake applies. However, since the Discovery Fund case involves IBK arbitrarily recording customers’ investment profiles and violating the duty of explanation during the sales process, applying contract cancellation due to mistake is difficult."

IBK Industrial Bank of Korea stated it will accept the FSS FDMC’s recommendation of a 40-80% compensation ratio. The bank said, "We plan to proceed with related procedures according to the decision" and "We will continue to strive to protect customers."

On the other hand, Discovery Fund victims are protesting, saying that by not applying contract cancellation due to mistake this time, the FSS has neglected its consumer protection role and demonstrated that it is not free from financial industry influence.

The Discovery Fund Fraud Victims Countermeasure Committee stated, "The government should separate the FSS’s financial supervisory function from its financial consumer protection function so that the consumer protection role can be independently performed," and added, "We demand voluntary mediation with IBK based on a new compensation standard, and if they do not comply, we will take collective action."

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