Regulator to crack down on pooled funds to restore investor trust

The Financial Services Commission, South Korea‘s top financial regulator, said Thursday it would carry out an all-out inspection of all privately-pooled investment schemes in a preemptive measure to protect financial consumers from exposure to unanticipated risks.

The target of the scrutiny will be 10,304 pooled funds and 233 investment houses dedicated to privately pooled funds as of the end of May. The total inspection is scheduled to be completed by September, while investment firms will be inspected until 2023.

If irregularities are found, such as a failure to abide by the terms of the portfolio construction, the investment firm is likely to have penalties imposed by the financial authorities or other measures to protect investors. Authorities could also refer the case to the prosecution.

The announcement comes amid a row of accidents involving the privately pooled funds. Asset management houses such as Lime Asset Management and Optimus Asset Management are accused of failing to construct a fund portfolio in accordance with their terms with feeder fund sellers and investors. They are also accused of having misinformed fund investors about the discrepancy and concealing the losses the change incurred. These funds are also accused of pooling more investor money to cover up the losses made in the previously botched investments and freezing funds to halt withdrawals.

“A series of financial losses are denting investor confidence in Korea‘s financial market,” said FSC Vice Chairman Sohn Byung-doo, who presided over a meeting at the FSC headquarters in Seoul.

The FSC intends to team up with industry watchdog the Financial Supervisory Service, Korea Securities Depository and Korea Securities Finance Corp. to create a 30-strong special team for the inspection.

“Financial authorities and related institutions will maintain close coordination to improve investor trust,” Sohn said. “We would also like to request that financial institutions be more active and spontaneous in dealing with, and preventing, financial consumers’ losses.”

The scrutiny is part of the measures to ward off their influence on Korea‘s entire financial system, the authorities said. In light of this, the FSC also looks to scrutinize peer-to-peer lending schemes -- whose delinquency rate reached 16 percent -- unlicensed financial entities such as investment advisers and lenders, as well as phone scams that Koreans call “voice-phishing.”

The move comes months after the financial authorities in Korea ramped up scrutiny in April by strengthening external audits of privately pooled funds -- which are limited to 49 investors or less -- starting the second quarter of 2020. It also obliged asset management firms to report its actions to enhance internal control and implement stress tests to ensure the funds‘ liquidity.

The authorities also laid out Wednesday legislative actions to prevent asset management houses from abusing master-feeder fund structures to avert regulations on public funds.

By Son Ji-hyoung (consnow@heraldcorp.com)