The Democratic Party of Korea will propose the 'Korean-style Fairfund Act' to compensate financial consumers who have suffered losses due to incomplete sales of financial products or market manipulation with government funds. This is intended to benchmark the Fairfund currently operating in the United States, but analysts in the financial sector suggest that securing financing may not be easy.
On the 15th, according to the National Assembly and the financial sector, Democratic Party lawmaker Park Sang-hyuk has decided to propose the 'Fair Compensation Fund Act.' The bill includes provisions for the Financial Services Commission to establish a fair compensation fund to compensate investors who have suffered losses from unfair transactional activities such as incomplete sales, insider trading, and market manipulation.
The fund will be financed by penalty surcharges imposed on financial firms. The fund's management will be handled by a committee involving officials from the Financial Services Commission and private experts.
Park said, "Although investors have suffered greatly from incomplete sales and unfair transactional activities, practical compensation for these losses is limited due to time and cost constraints," explaining the reasons for the bill's proposal.
This bill is modeled after the Fairfund in the United States. The Fairfund is a fund that compensates investors who have suffered losses after imposing penalty surcharges on wrongdoers. Investors harmed by unfair trading or incomplete sales can seek relief through this fund instead of lawsuits.
In the United States, the Fairfund was established using civil penalties and unjust enrichment recovery funds collected from individuals or securities firms that violated the Securities Act in 2002. Civil penalties are similar to the penalty surcharges in Korea, while unjust enrichment recovery funds resemble fines.
However, it is anticipated that securing funds for the establishment of the Fairfund will not be easy. Unlike in the United States, Korea's current scope of penalty surcharges for unfair trading is narrow and the rates are low, making it difficult to fund the Fairfund solely through penalty surcharges.
In March of last year, the Financial Supervisory Service prepared a compensation plan for victims during the Hong Kong H-index linked securities (ELS) incident, estimating the compensation amount to be around 1.5 trillion to 2 trillion won. Analysis from the financial sector suggests that it is challenging to fund a multi-trillion won fair fund solely through penalty surcharges. In the U.S., where astronomical penalty surcharges are imposed on financial firms, the cumulative amount of the fund is reportedly around $14.3 billion (approximately 20 trillion won).
Discussions about introducing a Korean-style Fairfund also took place in 2020, but failed to bear fruit due to disagreements over funding.
A financial sector official noted, "To establish a fund similar to that of the United States, we need to include not only penalty surcharges but also criminal fines, forfeitures, and recovery penalties in the funding sources," adding, "However, relevant ministries, including the Ministry of Justice, oppose this, so it seems that only penalty surcharges will be included for now."