Regulators apologize for hedge fund fiasco

South Korea’s top financial authorities on Wednesday pledged to investigate all private equity fund operators over the next three years, apologizing for causing public concerns over the snowballing hedge fund fiasco. 

“The recent fiasco is due to some irresponsible fund operators and lax oversight of the financial market,” said Financial Supervisory Service Gov. Yoon Suk-heun at a parliamentary briefing. 

“In August, the FSS will embark on a large-scale probe into PEFs as well as their operators in an effort to detect troubled funds early,” Yoon said. 

Meanwhile, the authority’s investigation of recent fund redemption suspensions by Lime Asset Management and Optimus Asset Management is in its final stage, the FSS said. 

Financial Services Commission Chairman Eun Sung-soo also said he feels grave responsibility. 

“I feel heavy responsibility as the head of FSC, the (market) regulator. ... With FSS, we will put our best efforts to prevent further damages by strengthening monitoring and improve related regulations.”

With the heads of the financial watchdog and the regulator offering apologies, a parliamentary report showed that the nation’s top banking groups have sold off equity funds worth some 70 trillion won ($58 billion won) in the last five years, with combined profits of 330 billion won, said Rep. Park Yong-jin of the ruling Democratic Party of Korea on Wednesday, quoting data from the financial watchdog.

The five major banking giants -- KB Financial Group, Shinhan Financial Group, Hana Financial Group, Woori Financial Group and NongHyup Financial Group -- saw a sharp rise in fund sales, with the total reaching some 19 trillion won last year. It had doubled since 2015, when the estimated figure was less than 5 trillion won, data showed. 

The domestic PEF market has grown rapidly since the policymaking FSC lifted regulations on PEFs in October 2015 as part of a move to boost the capital market. A PEF is a pooled investment scheme that directly invests in private, unlisted companies and engages in buyouts of public companies.

The move acted as an impetus for local lenders to expand their sales channels for PEFs to cover up for shrinking net interest income amid the low-interest rate environment. 

Ever since the interest rate in Korea reached an all-time high of 5.25 percent in 2009, the central bank has kept its policy rate low -- between 1 and 2 percent -- for about 10 years. That decision extended the downward curve in major banks’ net interest margins -- a measure of financial institutions’ profits from yields and interest. The figure slipped to a record low of 1.46 percent during the first quarter of this year, down 0.16 percent from a year earlier, according to the FSS.

Commission fees that local lenders received from the PEFs in return for selling the products sharply increased each year, jumping from 35.6 billion won in 2015 to 96 billion won last year. Of the major banks, Hana Bank earned the most with 96.6 billion won, followed by Woori (68.2 billion won), Shinhan (64 billion won), NH NongHyup (64.3 billion won) and KB Kookmin (38.4 billion won).

PEF sales by commercial lenders, including Hana, NH NongHyup and Shinhan, however, have been suspended since February due to the latest fund misselling fiasco related to now-frozen products managed by Lime Asset Management and Optimus Asset Management, which incurred investor losses of some 1.7 trillion won and 200 billion won, respectively.

By Choi Jae-hee (cjh@heraldcorp.com)