'Layered Regulations on Eroded Trust' Bank Private Equity Fund Sales Share Nears Collapse Below 3%

Shrinking Private Equity Fund Market in the Banking Sector

[Asia Economy Reporters Sunmi Park, Seungseop Song] The sale of private equity funds by banks is facing a crisis of collapse. Customer trust has been damaged due to a series of private equity fund redemption suspensions such as Derivative Linked Funds (DLF), Lime, and Optimus, and the implementation of the Financial Consumer Protection Act (FCPA) has complicated subscription procedures and made the sales environment challenging. The balance of private equity fund sales in the banking sector, which exceeded 29 trillion won just before the private equity fund crisis in July 2019, has shrunk to around 16 trillion won. This is only about 3% of the total sales amount. With no clear solution to increase sales, it is expected that bank sales of private equity funds will remain difficult next year.

◆Bank Private Equity Fund Sales Ratio at ‘Lowest’... Imminent Collapse of the 3% Level= According to statistics from the Korea Financial Investment Association on the 15th, the balance of private equity fund sales in the domestic banking sector has continued to decline monthly, reaching an all-time low. As of the end of September, it stood at 16.3167 trillion won, with a sales ratio of only 3.42%. This contrasts sharply with the securities industry, where the balance of private equity fund sales was 409.7869 trillion won, accounting for 85.83% of the total.

The bank sector’s private equity fund sales ratio was in the 8% range in 2018 but fell to the 6% range after the private equity fund crisis in 2019. In April this year, it dropped to the 3% range for the first time. Market observers believe that if this trend continues, the 3% level is likely to collapse soon.

There has also been a reversal in the number of private equity fund accounts between banks and securities firms. As of the end of September, the number and ratio of private equity fund accounts were 12,000 (13.19%) for banks and 77,000 (84.62%) for securities firms, with securities overwhelmingly higher. At the beginning of 2018, banks had 64,000 accounts (53.33%) and securities firms had 55,000 accounts (45.83%), with banks holding a clear majority.

The sharp decline in private equity fund sales in the banking sector is largely due to the series of private equity fund redemption suspension incidents starting in 2019. Given the conservative nature of bank customers who are more sensitive to investment losses than securities customers, the damage to fund sales trust caused by the private equity fund crisis was greater for banks. The introduction of strengthened financial regulations such as the FCPA to prevent recurrence of the private equity fund crisis has also fueled banks’ reluctance to sell.

◆"Difficult Next Year as Well" Banks Unable to Find a Breakthrough= Recently, what is tightening private equity fund sales in the banking sector is the six major sales principles implemented under the FCPA (principles of suitability, appropriateness, duty of explanation, prohibition of unfair sales practices, prohibition of improper solicitation, and prohibition of false or exaggerated advertising). Since the law was introduced to improve the incomplete sales practices of financial products, voices in the field overwhelmingly say that after the FCPA implementation, it has become difficult to sell not only private equity funds but also public funds.

The amendment to the Capital Markets Act and subordinate regulations, which strengthens regulations related to private equity funds and was implemented on the 21st of last month, is another hurdle. From now on, when investing in, recommending, or selling private equity funds to general investors, a key product description document must be provided, and loans to personal and gambling-related industries by private equity funds are prohibited. If sales or custodial companies have sold private equity funds to general investors, they must also check whether there were any unreasonable management practices.

Mr. Daehyung Oh (38, pseudonym), a PB working at the Gangnam-gu branch of Bank A, said, "When a customer interested in private equity funds comes, I first feel afraid that an accident might happen in the future," adding, "There are dozens of rules to follow for sales, and if I follow the regulations, it takes more than an hour to sell a product, so I can only respond passively."

Considering the atmosphere at the sales frontlines directly dealing with customers, it is difficult to expect a recovery in bank private equity fund sales next year. The reason banks are focusing on measures to minimize risk and restore trust rather than increasing sales to improve performance is also related to this. A KB Kookmin Bank official said, "We are considering expanding the lineup of medium-risk, medium-return products next year to secure customer trust." Shinhan Bank also said, "We are classifying customer groups according to asset risk levels and selectively launching customized private equity products," adding, "Next year, it has become important to select high-quality assets and launch products after sufficient verification."

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