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PEF minimums to be increased

And banks’ financial products to be subject to tighter scrutity

Nov 15,2019
Minimum investments in private equity will be increased to 300 million won ($256,343) from the current 100 million won to keep average Koreans from being exposed to potentially dangerous funds.

The government will also be banning banks from selling private equity funds (PEF) that have the possibility of losing more than 20 percent of their principal, and it will be increasing the accountability of executives and banks not properly informing customers of potential risks.
These are a few of the measures laid out on Thursday by the government to protect ordinary investors in the aftermath of the Woori Bank and KEB Hana Bank derivative fund crisis, which resulted in elderly investors losing their savings.

“[My heart] was wrenched at the thought of the pain investors felt worrying about losing all of their savings collected from a lifetime of blood and sweat,” said the Financial Services Commission Chairman Eun Sung-soo during a press briefing. “[I] was on edge over concerns that the trust on banks, which many believed would protect personal wealth safely, would crumble and that this mistrust would lead to instability in the financial market.”

He accused banks of devising complicated ways of avoiding regulations that protect investors against risky financial products, adding that if they followed public offering fund regulations, risky derivative-linked funds (DLF) could not have been sold.

Eun said that any financial products with underlying assets and a profit structure similar to that of a public offering will be regulated as a public offering rather as a private offering. Public offerings receive far more scrutiny that private offerings.

DLFs were said to have been sold as private equity funds to avoid regulations despite being essentially public offerings.

The FSC has also decided to make access to private equity funds much more difficult by tripling the minimum investment.

“In the case of the recent DLFs, some of the investors made investments way beyond their abilities, including taking out loans or investing all of their life savings,” the FSC Chairman Eun said. “To prevent similar situations from happening, we have decided to raise the minimum requirement from 100 million won to 300 million won so that only those that have the ability to bear the risk could invest in private equity funds under their own responsibility.”

He also said the government will lower the age on those categorized as elderly investors from the current 70 years old to 65.

A Financial Supervisory Service study has found that 49 percent of the DLF investors were 60 years old or older, while 21.3 percent were 70 years old or older.

Many of the elderly investors claimed that they had little understanding about DLF products when they signed up and that they relied on the advice of bank employees, who claimed that the financial product is safe.

Eun said as banks are responsible for protecting the deposits of their clients, they will be banned from selling derivative products with the risk of losing 20 percent of the investment.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]


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