Should distributors of mismanaged financial products be held liable?

Financial Supervisory Service (FSS) Governor Yoon Suk-heun presides a meeting with the CEOs of local banks held at the Korea Federation of Banks last month. On Tuesday he urged financial firms that distributed Lime Asset Management's trade finance funds to follow through with the FSS order to compensate 100 percent of the invested monies in the fund. / Korea Times file

By Kim Bo-eun

All eyes are on the decision banks and brokerages will reach on Aug. 27 on compensating investors of financial products they sold of the now-defunct Lime Asset Management. The Financial Supervisory Service (FSS) has directed them to offer full compensation for a trade finance fund, which is among Lime's funds for which redemptions were halted based on its mismanagement of investments.

Controversy continues as the distributors of the investment products have been designated to provide compensation and the investment firm managing the funds has been let off the hook.

The FSS concluded in June that distributors of Lime's funds, including Woori and Hana banks, and brokerages Shinhan Investment and Mirae Asset Daewoo, should return to investors the principal of their investments by nullifying their contracts.

The supervisory agency stated it found Lime's investment proposal for the fund to have included false information on the rate of return on investments and risks associated with the investments.

The FSS said the distributors, meanwhile, were responsible for misguiding investors by conveying the information in the investment proposals to them without thorough review. In some cases, officials of financial firms were found to have identified investors as high-risk takers even though they were not.

Citing the responsibility of distributors, the FSS for the first time ordered financial firms to nullify contracts with investors in dispute settlement cases involving financial investment products.

Woori and Hana banks, and Shinhan Investment and Mirae Asset Daewoo are set to decide at board meetings to be held Aug. 27 whether they will provide full compensation.

"It appears likely that the firms will compensate investors, given the sentiment these days over consumer protection," an official of one of the firms said.

"Financial authorities have pledged to take action if the distributors do not follow their orders."

The FSS has been pressuring the firms, on Tuesday issuing a press release which stated FSS Governor Yoon Suk-heun urging distributors of Lime's trade finance funds to accept its dispute settlement plan.

He also asked for FSS executives to place greater importance on whether or not the firms have taken steps to protect consumers.

This comes after financial firms involved in the " KIKO fiasco" refused to compensate SMEs that saw major losses from currency-linked financial derivative products in 2008.

The FSS in December ordered six banks to pay exporting firms up to 41 percent of losses that were incurred. Five of the six banks defied the order, citing the right to seek compensation is no longer valid as such claims are subject to a 10-year limit.

Distributors of Lime's trade finance fund claim it is unfair that they should compensate investors, when the prime fault lay with the asset-managing entity.

Regarding the matter, an FSS official said, "They are able to seek indemnity from the investment firms that managed the funds, after first providing compensation to investors."

But it is unclear whether the financial firms will be able to be compensated, given the complicated structure of the funds that makes it difficult to determine how much responsibility each entity holds.

"Authorities simply think that financial firms are capable of withstanding such losses, if they occur," an official of a financial firm said.

While the FSS' orders are not binding, the fund distributors are likely to decide to provide compensation.

The regulator earlier hinted it could seek to make its orders regarding dispute settlements legally enforceable, following the KIKO fiasco involving knock-in, knock-out funds.

Rep. Lee Yong-woo of the Democratic Party of Korea earlier this month proposed revisions to laws on protecting financial consumers, which seek to impose obligation on financial firms to comply with FSS orders over dispute settlements on compensations of less than a certain amount.