Investors Can Get Compensation for Fund Losses
By Kim Tae-gyu
Staff Reporter
Investors in money-losing funds may be able to get compensated, at least partially, even if they have signed a written contract that is believed to exempt fund sellers from any obligation.
The conventional belief was that fund subscribers would not get reimbursements for any losses if they had signed a contract after listening to explanations by brokers.
Kim Dong-won, assistant governor of the Financial Supervisory Service, made the point Monday during a telephone interview with The Korea Times.
``A bank or securities firm will have to take responsibility if they are found not to have explained enough about the funds even if subscribers signed a contract stating that they have listened to the details,’’ Kim said.
His interpretation may have an influence on current suits investors have filed against banks and asset management companies.
``Included in the minimum explanations by sellers are that funds may cause a loss of principal and customers will be charged with service fees,’’ he said.
When people sign up for a fund, banks or securities companies are supposed to give details to them and obtain their signature to complete the contract.
Thus far, the signature has been believed to automatically cover sellers in all cases, but Kim’s remarks mean that this may not be so.
``If fund subscribers can prove sellers did not explain the details of a fund, they have a shot at getting compensation. A recent favorable decision for an investor took this into account,’’ Kim said.
The investor got part of his investment back due to the lack of an explanation ― this was proven through a recording of his conversation with the seller, he added.
``We factor in many things such as subscribers’ age, experience or wealth in deciding whether a fund manager gave enough of an explanation. If a 70-something without any experience subscribed to a complicated currency hedge fund, we would regard it as problematic.
``At the moment, subscribers are required to prove that they did not receive a proper explanation despite their signatures, which is pretty difficult,’’ Kim said.
``However, things will become totally different early next year when brokers have to produce the burden of proof under the Capital Market Integration Act,’’ he said.
Under the act, which goes into effect next February, brokers will have to prove they gave a sufficient explanation to subscribers. Otherwise, they will be held responsible.
In addition, brokers will be required to provide investment advice in tune with the financial needs and situation. Hence, the rule is called a ``know-your-customer regulation.’’
Currently, the necessity of proof lies with those who complain ― fund subscribers would lose a litigation if they fail to prove that the sellers provided an insufficient explanation.
The FSS expects the new rule will force banks or securities firms to equip themselves with recorders or closed circuit TV, which will help weed out any legal controversy.