Lime Fund Dispute Mediation Committee Orders First Ever 100% Compensation from Sales Company

Financial Supervisory Service Dispute Mediation Committee's First Ever 100% Compensation Decision
Approximately 160 Billion KRW Worth of Trade Finance Funds Sold Since November 2018 Targeted

[Asia Economy Reporter Koo Eun-mo] The Financial Supervisory Service’s Dispute Mediation Committee has, for the first time ever, ruled that investors who suffered losses from Lime Asset Management’s trade finance fund, which caused a massive redemption suspension crisis, must be fully compensated for their principal investment.

On the 1st, the Financial Supervisory Service’s Dispute Mediation Committee (DMC) announced that it decided to order the sales companies, the counterparties to the sales contracts, to return the full principal amount of investments for four dispute mediation applications related to Lime Asset Management’s trade finance fund (Pluto TF-1), sold since November 2018, based on Article 109 of the Civil Act concerning ‘contract cancellation due to mistake.’

This is the first time the DMC has recommended a 100% compensation ratio for losses incurred from financial products, including private equity funds. Previously, the highest recommended compensation ratio was 80% for overseas interest rate-linked derivative-linked funds (DLF).

The trade finance fund subject to this mediation is a product invested in an overseas trade finance fund managed by the International Investment Group (IIG), with a total sales volume of 240 billion KRW since May 2017. Among these, Shinhan Financial Investment, which had entered into a total return swap (TRS) with Lime Asset Management and provided loans for the product, sold approximately 160 billion KRW worth of the fund from November 2018 despite knowing about the IIG fund’s insolvency. This portion is the direct subject of the DMC’s mediation.

The DMC recognized that at the time of contract signing, the IIG fund, a major investment asset, was already significantly impaired, yet the asset manager falsely or inadequately recorded key information such as returns and investment risks in the investment proposal, and the sales companies provided the investment proposal to investors as is, causing investor mistakes.

Furthermore, some sales staff arbitrarily recorded investors’ risk profiles as ‘aggressive investors’ or drafted loss compensation agreements, thereby blocking investors’ opportunities to make rational decisions. Considering this, the DMC judged that it is difficult to regard investors as grossly negligent.

According to the DMC’s decision, if the dispute mediation applicants and financial companies accept the mediation proposal within 20 days after receiving it, the mediation will be established with the same effect as a court settlement.

The DMC explained, “For other investors who subscribed to the Lime trade finance fund sold since November 2018, we plan to handle the cases through voluntary mediation based on this DMC decision.” It added, “If the mediation process proceeds smoothly, it is expected that up to 161.1 billion KRW of principal investment will be returned to about 500 individual investors and 58 corporations.”

Additionally, the DMC reported that it has notified the relevant inspection department of regulatory violations confirmed through on-site investigations, including arbitrary recording of investor profiles, drafting of loss compensation agreements, violations of real-name verification procedures, forgery of contract documents, and violations of elderly investor protection procedures.