"Worried About Selling Private Equity Funds"... Bank Funds Facing Crisis, What Will Happen Next Year? (Comprehensive)

Banking Sector's Private Equity Fund Sales Balance Drops from 29 Trillion to 16 Trillion
Sales Share Was 8%... Now Barely 3%
Impact of Redemption Suspension Crisis and Financial Regulations Including Geumso Act

[Image source=Yonhap News]

[Asia Economy Reporters Sunmi Park, Seungseop Song]Mr. Oh Daehyung (38, pseudonym), who works as a PB at Bank A in Gangnam-gu, Seoul, finds customers who rarely wish to subscribe to private equity funds burdensome. This is because there are dozens of rules to follow under the Financial Consumer Protection Act (FCPA), and both superiors and financial authorities scrutinize the process strictly. It takes at least an hour to sell a product to a customer according to the regulations. Mr. Oh confessed, “I also worry that the private equity funds I sold might get involved in an unfortunate incident.”

Private equity fund sales in the banking sector are facing a crisis. 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 difficult. The balance of private equity fund sales in the banking sector, which exceeded 29 trillion won in July 2019 just before the private equity fund incidents, has shrunk to the 16 trillion won range. This is only about 3% of the total sales amount. With no clear solution to increase sales, it is expected that private equity fund sales by banks will remain difficult next year as well.

Bank Private Equity Fund Sales Ratio at ‘Lowest’... Imminent Collapse Below 3%

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 and has fallen to 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% during the same period.

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

The number of private equity fund accounts has also reversed 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 having significantly more.

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 since 2019. Given the conservative customers in the banking sector who are more sensitive to investment losses than securities firms, the damage to fund sales trust caused by the private equity fund incidents was greater for banks. The introduction of strengthened financial regulations such as the FCPA to prevent recurrence of private equity fund incidents also fueled banks’ reluctance to sell.

What is currently tightening private equity fund sales in the banking sector is the six major sales principles implemented under the FCPA (principles of suitability and appropriateness, duty to explain, prohibition of unfair sales practices, prohibition of improper solicitation, and prohibition of false or exaggerated advertising). Since the law was introduced to improve the practice of incomplete sales of financial products, voices in the field overwhelmingly say that it has become difficult to sell not only private equity funds but also public funds after the FCPA implementation.

“Difficult Again Next Year”... Banking Sector Unable to Find Breakthrough

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 to overcome. 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 a sales or custody company sold private equity funds to general investors, it must also check whether there were any unreasonable management practices.

Above all, market distrust is growing as incidents related to private equity funds are not being resolved quickly. According to data submitted by the Financial Supervisory Service to Jin Sunmi, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, the amount of unrecovered or unredeemed sales balances among financial companies due to the private equity fund incidents reaches 5.5 trillion won. The banking sector accounts for 1.6537 trillion won, and the securities industry 3.8488 trillion won. Jin Sunmi stated, “The Financial Supervisory Service’s prompt response is important for the swift and accurate relief of investors’ damages.”

Considering the atmosphere at sales sites that directly interact with customers, the weight of opinion is that it will be difficult to expect a recovery in bank private equity fund sales next year. Rather than increasing fund sales to boost performance, banks have prepared strategies focusing on minimizing risks and restoring trust. A KB Kookmin Bank official said, “We are reviewing ways to secure customer trust by expanding the lineup of medium-risk, medium-return products next year.” 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 thorough verification.”

However, the recent market-friendly moves by the newly appointed heads of financial authorities are a positive factor. Although private equity fund-related regulations will not be eased immediately, the basic policy emphasizes self-regulation and related incentives rather than excessive sanctions or inspections of financial companies. Financial Services Commission Chairman Ko Seung-beom has said, “Policies should be promoted to maximize the creativity and autonomy of financial companies,” and Financial Supervisory Service Governor Jung Eun-bo also emphasized, “The essence of financial supervision is support, not regulation.”

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