[Q&A] FSC Hopes Financial Firms Accept Recommendation to Fully Refund Lime Fund

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[Asia Economy Reporter Eunmo Koo] As a result of dispute mediation regarding Lime Asset Management's trade finance fund, which caused a suspension of redemptions, a decision was made to compensate investors with the full amount of their principal investment. This is the first time in the history of financial investment product dispute mediation that a 100% principal refund to investors has been ordered.

The Financial Supervisory Service's Dispute Mediation Committee (DMC) announced on the 1st that it decided to order the sales companies, which are the counterparties to the sales contracts, to return the full principal amount 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, "Contract Cancellation Due to Mistake."

Below is a Q&A with Kim Cheol-woong, Director of the Dispute Mediation Division 2, and others from the Financial Supervisory Service's Dispute Mediation Bureau.

- Why was the contract cancellation based on mistake determined rather than cancellation due to fraud under the Civil Act?

"The DMC considered both cancellation due to fraud and cancellation due to mistake. First, cancellation due to fraud requires proving the existence of deception in a criminal trial, and the head of Shinhan Financial Investment's PBS division has been arrested and indicted, with the criminal trial ongoing. However, until the criminal trial is finalized, which takes a long time, it is difficult to proceed on the basis of fraud from the perspective of prompt relief for victims. The DMC thoroughly discussed this and concluded cancellation due to mistake, which has the same effect for investors."

- Why is the sales company, not Lime Asset Management or Shinhan Financial Investment, ordered to compensate the full principal?

"Cancellation due to mistake means canceling the fund sales contract. According to court precedents, the parties to the fund sales contract are not the asset management company but the securities firms or banks that sold the fund. Therefore, the obligation to return the principal lies with the sales companies according to precedent. In the future, the sales companies will separately pursue lawsuits against the asset management companies that actually committed illegal acts."

- What was the selection process for the four cases related to the trade finance fund dispute mediation?

"We conducted on-site investigations of five sales companies that sold the fund since November 2018. Among them, we investigated four companies (Woori Bank, Hana Bank, Shinhan Financial Investment, and Mirae Asset Daewoo) that had complaints filed. We selected representative cases from complaints against these four companies. The cases most appropriate for cancellation due to mistake were chosen as representative examples."

- Is full compensation difficult for subscribers before November 2018?

"I understand that asset due diligence is currently underway for cases before November 2018. Since it is a trade finance fund, it is difficult to proceed because active cooperation from Rhodium, a foreign company, has not been obtained to verify the existence of overseas contracts. The exact amount of loss cannot be accurately estimated. Currently, only total loss is estimated, but it cannot be said that the damage is definitively confirmed. It is expected that after the due diligence results and the extent of fund refunds from Rhodium are clarified, the legal relationship will be resolved and compensation may be possible."

- In deciding contract cancellation due to mistake, it was seen that the sales companies provided or explained the investment prospectus to investors without thorough review of their responsibility. It seems that prior knowledge of deficiencies was not part of the judgment basis. If other recently problematic private equity funds were operated differently from the investment prospectus at the time of sale, could contract cancellation due to mistake be possible?

"The reason for recognizing cancellation due to mistake for the first time for an investment product was that, as announced in February, on-site inspections of Shinhan Financial Investment and Lime, as well as recent investigations, proved that significant deficiencies already existed at the time of contract. Therefore, cancellation was decided under the Civil Act, recommending 100% refund. For other funds, if inspections or investigations confirm similar facts, the same process will be followed. However, so far, it has not been proven. In financial investment products, fraudulent unfair trading under the Capital Markets Act can be considered, but if the requirements for contract cancellation under the Civil Act are met, that will be examined first. Proof is essential. Cancellation due to mistake requires a defect in an important part of the contract content. For recent private equity fund cases, to apply cancellation due to mistake, it must be proven that there was a defect in an important part."

- Previously, with DLF, there were circumstances where sales continued despite negative interest rates in Germany and other countries, but the compensation ratio was relatively low. Has the consumer protection stance been strengthened compared to before, or is there a difference from DLF?

"Consumer protection must be based on strict factual and legal judgments to go beyond the limits of dispute mediation. Even if mediation recommends compensation, it only takes effect if the sales companies accept it. Therefore, consumer protection pushed recklessly will no longer be accepted in the financial market. This decision was made based on reasonable legal judgment and facts.

Although DLF was sold during a period of negative interest rates, there was a possibility of future interest rate recovery. In contrast, the trade finance fund's IIG fund had already experienced insolvency, and an email initiating liquidation procedures was received, making recovery impossible. That is the difference between DLF and the Lime fund."

- How do you view the financial companies' acceptance of this decision?

"To increase the likelihood of acceptance by financial companies, we carefully examined the legal and factual aspects. Experts recognized the legal validity, so the decision was made for contract cancellation due to mistake. We hope financial companies accept this as an objective and professional legal recommendation. Since large financial companies are the sales companies, if the recommendation is based on reasonable and professional legal judgment regarding investor protection responsibility, they will likely accept it. However, since it must be submitted to the financial companies' boards, we expect intense legal disputes or debates in the future."

- In the case of Optimus Asset Management, if there was insolvency at the time of the fund contract, is cancellation possible?

"Optimus contract cancellation can be reviewed depending on the results of the prosecution investigation and our examination. At this point, it is difficult to make definitive statements."

- When was the dispute mediation proposal submitted?

"Usually, internal procedures take about a week before notification. If the mediation proposal is accepted within 20 days after notification, mediation is established. This time, since the legal issues are not complicated, an extension may be granted once."