The Financial Supervisory Service will improve its supervisory approach by imposing joint responsibility on both manufacturers and sellers in the process where the risk of financial investment products, such as high-risk funds, is conveyed to investors. For asset management companies with large losses, it will track their records and conduct high-intensity reviews of newly launched funds.
On the 13th, the Financial Supervisory Service held the Financial Consumer Protection Forum for a shift to financial supervision centered on financial consumer protection and discussed ways to strengthen the effectiveness of consumer protection at the development and sales stages of financial investment products. The event was attended by Lee Chan-jin, head of the Financial Supervisory Service (FSS), Seo Yu-seok, head of the Korea Financial Investment Association, and Democratic Party of Korea lawmakers Kim Seung-won and Kim Hyun-jung, among others.
Lee Chan-jin of the Financial Supervisory Service (FSS) said, "Consumer harm has occurred recently in some overseas real estate funds, including cases of misselling of equity-linked securities (ELS) tied to the Hong Kong H-index that incurred losses in the trillions of won," and noted, "This suggests the need to examine whether financial firms fully reflected potential loss risks arising from environmental changes and explained them in a way consumers could easily understand."
The Financial Supervisory Service (FSS) decided to pursue improvements in three directions. First, in the product design process for high-risk funds such as overseas real estate, it will establish an internal control system that identifies, measures, and evaluates risks, so that the compliance and risk management departments verify fund design with an independent perspective. The aim is to put in place proactive consumer protection mechanisms from the design stage.
In the case of overseas real estate funds, assets under management surged during the real estate market upswing from 2016 to 2019. But as the market slumped due to rising interest rates, refinancing ran into difficulties, and losses materialized for some funds.
In the recent incident involving Korea Investment & Securities' Belgium fund, the investment was in a long-term leasehold on a building in Brussels, Belgium. However, after a failure to repay the loan last year, an event of default (EOD) occurred, and as the senior lender moved to forcibly dispose of the asset, it resulted in a total loss. The Financial Supervisory Service (FSS) has launched on-site inspections to look into allegations of misselling by financial firms that sold the Belgium fund.
The Financial Supervisory Service (FSS) pointed out problems such as inadequate deal-sourcing review procedures for overseas real estate funds, perfunctory on-site due diligence and investment screening, overly optimistic evaluations of investment risk, and failure to manage the track records of managers that incurred large losses in similar funds.
To address this, the Financial Supervisory Service (FSS) will clearly describe key risks for related funds in a way investors can understand and will prepare a standard template for key risk disclosures through general blind testing, among other measures, to ensure compliance with the duty to explain.
It will also strengthen the responsibility of financial product manufacturers and sellers. Through focused reviews of high-risk funds, the Financial Supervisory Service (FSS) will supervise whether asset managers properly hand over key risks to sellers and whether sellers convey them clearly. It will also manage the track records of watchlist managers that experienced large losses and scrutinize newly launched funds with high intensity.
The Financial Supervisory Service (FSS) said it will carefully review on-the-ground opinions and policy recommendations presented at the forum and reflect them in its supervisory work, while moving swiftly on consumer protection tasks.
Lee said, "For financial firms, consumer protection is not a short-term expense but a long-term investment for building trust and growth," adding, "We will actively pursue institutional improvements through close consultations with the National Assembly and related agencies."