Financial Supervisory Service, Lime Sales Company Dispute Mediation Committee...Extent of Compensation

Application of Incomplete Sales Likely at 40-80%... Investor Acceptance Is Key

[Asia Economy Reporters Jihwan Park and Jinho Kim] The Financial Supervisory Service (FSS) will hold a Dispute Mediation Committee (DMC) meeting on the 13th regarding the sales companies of Lime Asset Management whose redemption has been suspended. Investors are demanding full principal compensation, as the DMC previously recommended full compensation by applying "contract cancellation due to mistake" to the Lime Pluto TF-1 (Trade Finance Fund). However, considering recent court rulings, it is expected that a 100% compensation plan will be difficult, making it challenging to find a consensus between sales companies and investors.

The FSS will hold the DMC meeting at its Yeouido office in Seoul with Daishin Securities, Hana Bank, and Busan Bank. Daishin Securities sold Lime Asset Management funds worth 200 billion KRW, while Hana Bank and Busan Bank sold 87.1 billion KRW and 52.7 billion KRW respectively. Attention is focused on whether Daishin Securities will receive a compensation recommendation for "contract cancellation due to mistake," allowing 100% principal refund like the Trade Finance Fund. Previously, Jang, the former head of Banpo WM Center, was sentenced to two years in prison in the first trial last December for selling Lime funds while concealing the possibility of losses. In the appeal trial in May this year, an additional fine of 200 million KRW was imposed.

However, since the court recognized only violations of the Capital Markets Act and not fraud charges against former head Jang, it is practically difficult to apply "contract cancellation due to mistake or fraud," which allows 100% compensation, and it is analyzed that incomplete sales charges will be applied. An FSS official said, "Whether the conditions for fraud apply will be discussed at the DMC. However, internally, the consensus is that it is not a matter that can be regarded as 'fraud'."

If incomplete sales charges are applied, customers who invested in Lime funds are likely to receive compensation of 40-80% of their losses. Typically, in cases of incomplete sales, the basic compensation rate is 30%, with additional charges for sales staff's breach of explanation duty and internal control failures at the head office. At the end of last year, the DMC set the compensation rate for KB Securities, another Lime fund sales company, at 40-80%. Similar compensation plans are expected to be decided for Hana Bank and Busan Bank. Previously, the compensation rates for Shinhan Bank and Woori Bank related to Lime funds were also at the 40-80% level.

In the case of Hana Bank, whether it accepts the dispute mediation proposal this time is expected to affect the disciplinary review committee meeting scheduled for the 15th. Accepting the DMC recommendation will likely lower the disciplinary level as efforts to remedy damages will be recognized. Shinhan, Woori, and Industrial Bank of Korea, which accepted dispute mediation proposals earlier, also had their CEO disciplinary actions reduced at the disciplinary review. The Board of Audit and Inspection's report criticizing the FSS's inadequate management and supervision related to the private equity fund incident is also expected to lead to a reduction in disciplinary severity at the review.

However, the recently raised expectations of investors remain a key issue. Recently, companies like Korea Investment & Securities have proposed 100% compensation plans, maintaining a stance that they will not accept mediation unless the full principal is returned. If mediation agreement fails, investors will have no choice but to pursue litigation to recover their full investment principal.

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