Financial regulator vows tighter rules for PEFs in 2021

Yoon Suk-heun
Yoon Suk-heun

Private equity funds (PEFs) will be subject to tightened rules this year, as indicated by the New Year speech made by Financial Supervisory Service (FSS) Governor Yoon Suk-heun.

The vocal resolve was part of a rebuke against the Financial Services Commission (FSC), the FSS’ supervisory organization supposedly in charge of financial market regulations and monitoring as well as implementation and creation of related rules, the key failed functions Yun believes have led to the mis-selling of derivative-linked funds (DLFs) and redemption failures involving hedge funds.

The immense investor losses and consumer protection failures will be repeated, he stressed, unless there is a fundamental change in the mindset of financial market participants ― especially those who design and sell the highly structured and complicated products ― who are incentivized and numbed by the reward for selling the possibly highly defective products which far outweighs risk management costs.

The year-long fiasco led to around 2 trillion won ($1.8 billion) in investors’ losses, with a far greater amount of shakier funds amounting to about 6 trillion won, according to data presented during an Assembly-conducted government audit in October 2020.

“We should strengthen around-the-clock regular monitoring system, thereby increasing our supervisory capabilities, a crucial step needed not to be blindsided by what could and should have been avoided with organizational resources and simple caution,” he said during the speech.

Eased rules to grant greater consumer access to high-risk, high-return PEFs have fueled demand for higher profits without necessary accountability of creators and sellers of the risky products, a reason why internal control of financial services firms should be overhauled.

“The products in question should be sold to investors who are not only well aware of the risks but are also willing to take them, with more responsible sales practices needed from firms that manage and sell the products,” he added.

The remark points to the eased rule on the requirements concerning the sales practices of a PEF in 2015. As long as a certain PEF limits the number of investors to up to 49, the regulatory definition of a “small number” of high-net-worth asset owners with expertise, it can be exempt from related regulations including mandatory submission of a securities report to financial authorities. The fund can then invest in one stock item, an investment method banned for other publicly raised investment funds required to maintain a diversified stock investment portfolio. Related rules dictated that only “expert investors” be allowed to invest in the privately raised fund, but individual retail investors were granted the same access following the 2015 revision.

Not being able to express opposition to deregulation of related rules was regretful in hindsight, he noted.

“We should have put the brakes on harder and more confidently when talks on deregulation of PEFs were ongoing back in 2014 and 2015, but we could not. We should also reflect on whether our practices over the past few years helped enhance consumer protections and financial accident prevention.”

Source: korea times