As cases of total loss of invested funds in overseas real estate funds continue, the Financial Supervisory Service will strengthen investor protection even before products are launched. In addition to requiring management companies to conduct on-site due diligence of local properties and to have their internal control departments provide assessment opinions, the agency also required prospectuses to specify the key risks of high-risk funds and even past loss records.
The Financial Supervisory Service (FSS) held a "roundtable with asset management companies to strengthen investor protection for high-risk funds such as overseas real estate funds" on the 9th and emphasized these points to real estate fund asset management companies and executives of the Korea Financial Investment Association.
The Financial Supervisory Service (FSS) will first strengthen management companies' self-checks on the investment targets of overseas real estate funds. Earlier, a review by the Financial Supervisory Service (FSS) of asset management companies found cases in which the local firms' due diligence on the target properties lacked specificity.
Accordingly, on Apr. 4 the Financial Supervisory Service (FSS) improved related procedures to require asset management companies to conduct direct self-reviews of the investment targets of overseas real estate funds and to require the internal control departments to record assessment opinions.
Reviews of high-risk funds will also be further strengthened. For preemptive consumer protection, in Jan. this year the Financial Supervisory Service (FSS) created a special review team within the Asset Management Supervision Department and introduced a focused review system for high-risk products such as overseas real estate funds.
When reviewing overseas real estate funds, the agency will examine whether the management company conducted on-site due diligence on the target property and faithfully prepared and attached a self-check report. It also plans to closely verify, under the standard for key risks, whether the main risks that investors must know are appropriately stated in the prospectus.
A system to notify investors more clearly of investment risks in high-risk funds will also be implemented. Starting on the 30th, the first page of the summary prospectus must list four key investment risks for each fund. Based on principal loss risk, three fund-specific special risks will be added so investors can intuitively grasp the product's main risks.
For overseas real estate funds, key investment risks may include ▲ principal loss risk ▲ risks from fund leverage ▲ risk of not receiving dividends ▲ exchange-rate fluctuation risk. Past records of large losses will also be included to increase management companies' accountability and improve investors' understanding of risks.
Seo Jae-wan, assistant deputy governor for capital markets at the Financial Supervisory Service (FSS), said, "In some recent products, total loss of investment occurred due to deterioration of the underlying assets and subordinated equity investment structures," and emphasized, "Management companies must strengthen self-checks on overseas real estate funds and strictly comply with investor protection measures, including the entry of key risks for high-risk funds."