FSS Recommends Daishin Securities Compensate 80% for Losses in Lime Fund Sales

[Asia Economy Reporter Park Jihwan] Individual investors who suffered losses after investing in Lime Asset Management's private equity funds sold by Daishin Securities are expected to be compensated for 80% of their losses. This is about 20-30 percentage points higher than the basic compensation rates of other Lime fund sellers.

On the 29th, the Financial Supervisory Service (FSS) announced that it decided on this compensation standard based on the results of the Dispute Mediation Committee meeting regarding Daishin Securities' fund sales case. The committee set the basic compensation rate for Daishin Securities at 80%, the highest level among existing Lime fund sellers. Considering that KB Securities had a 60% rate, Woori, Shinhan, and Hana Banks had 55%, and Industrial and Busan Banks had 50%, this represents a 20-30 percentage point higher compensation rate. The committee stated, "Daishin Securities bears significant responsibility for causing numerous high-value victims due to inadequate internal controls related to private fund launches and sales, as well as poor branch office supervision."

The key issue in this mediation was whether 'contract cancellation' due to fraudulent unfair transactions could be applied to the Lime funds sold by Daishin Securities. If contract cancellation is recognized, 100% compensation is possible; however, if the conclusion is incomplete sales, only partial compensation is possible.

The committee chose incomplete sales. It judged that Daishin Securities' inadequate internal controls related to product launch and sales, poor supervision of branch offices, insufficient employee training materials and customer explanation documents, violations of explanation obligations and suitability principles, and breaches of the prohibition on unfair solicitation and unfair transactions made it difficult to consider the case as fraudulent unfair transactions. Investor A, a general investor, was sold a super high-risk product fund (grade 1) without confirming the investor's investment propensity, resulting in an 80% compensation decision. A believed the explanation that the fund was a non-risky product investing in 90% secured financing within a 50% loan-to-value (LTV) ratio and subscribed to the fund.

The basic compensation rate applied to Daishin Securities is 50%. An additional 20 percentage points were added after violations of the Capital Markets Act regarding unfair transactions and prohibition of unfair solicitation, which had not been confirmed in previous private fund dispute mediations, were confirmed by court rulings. Daishin Securities sold Lime funds worth 200 billion KRW through the Banpo WM Center. At that time, former center head Jang was sentenced to two years in prison in the first trial for violating the Capital Markets Act by hiding the possibility of losses in the Lime fund sales, and in the appeal trial, an additional fine of 200 million KRW was imposed. Previously, in private fund dispute mediation cases, only violations of suitability principles and explanation obligations by sales staff were applied, resulting in a 30% compensation rate. Additionally, a common additional rate of 30% was applied considering the responsibility for causing numerous high-value victims due to incomplete sales that continued over a long period using explanation materials that were not properly reviewed or examined because branch office supervision at the head office level was not properly conducted.

Other investors who were not brought before the Dispute Mediation Committee will receive compensation rates adjusted based on their investment experience and other factors, using the basic compensation rate as a reference. The FSS plans to promptly facilitate voluntary adjustments with compensation rates ranging from 40% to 80% according to the newly established compensation standards. Compensation rates for corporate clients range from 30% to 80%.

The Dispute Mediation Committee's compensation decision is not binding; the applicant and the seller must accept the mediation proposal within 20 days after its receipt for it to take effect. An FSS official said, "If the mediation process proceeds smoothly, relief for the unpaid 183.9 billion KRW (554 accounts) due to redemption delays will be concluded."

If the mediation results are accepted in the future, victims will receive compensation within the determined rates. Victims who do not accept the compensation rates can either file complaints again with the FSS or choose to file individual civil lawsuits against financial companies.

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