[Opinion] 'One-time Events' Are Not the Answer

Cookie A is a defective food product. It was made using spoiled ingredients from the start. Some sellers blinded by profit margins even placed custom orders to have it made that way, and some sellers sold it as delicious without verification or knowledge. When the defects became noticeable, the manufacturer even mixed it with intact Cookie A to cover it up. Fortunately, since the sales points were not widespread, not many buyers suffered from stomach issues.

Cookie B is a normal food product. The raw materials are fine, and it even received safety certification from institutions. The profit margins were decent, so sellers actively promoted it. Many consumers who had tried it before purchased it without hesitation. However, a problem arose. Due to an unexpected heatwave that even sellers did not anticipate, Cookie B spoiled, causing many buyers to suffer from stomach problems.

Cookie A represents private equity funds such as Lime and Optimus, which shook the financial market in 2019-2020. Some securities firms ordered asset management companies to create these funds. Some funds did not contain the promised high-quality financial products from the beginning, and some concealed losses by mixing them with other funds. Eventually, a stock price decline triggered a crisis where redemptions became impossible. Since these were private placements, the scale of damage was about 5,500 people (around 4,500 for Lime and 1,000 for Optimus) and approximately 2.1 trillion won (1.6 trillion won for Lime and 500 billion won for Optimus). At that time, the Financial Supervisory Service’s Dispute Mediation Committee set the basic compensation rate for losses at 50-60%.

Cookie B refers to this year’s Hong Kong H-Index (Hang Seng China Enterprises Index, HSCEI) equity-linked securities (ELS) that have stirred the financial market. These are public offering products approved by financial authorities. They are far removed from custom orders, circular financing, or fraud. Many investors have already experienced high returns with this product. However, an unexpected crash in the Hong Kong H-Index caused massive losses. Being a public offering, a staggering 400,000 accounts are tied up with 19 trillion won. Last week, the Financial Supervisory Service’s Dispute Mediation Committee announced a basic compensation rate for losses of 20-40%.

Article 55 of the Capital Markets Act stipulates that “financial investment businesses shall not engage in loss compensation.” This regulation is the flip side of the principle of investor self-responsibility. Because of this rule, banks and securities firms that sold Lime funds were troubled by the pressure from the Financial Supervisory Service’s Dispute Mediation Committee to compensate for losses. At least back then, there were questionable aspects such as custom orders, circular financing, and fraud. Financial companies feel it is unfair that Hong Kong ELS is being treated on the same level as Lime funds. Moreover, in addition to the legal compensation standard of incomplete sales, arbitrary criteria such as age, amount, and subscription experience were applied. Financial companies now have to worry about breach of trust charges after compensation.

Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, evaluated, “Looking at the compensation rate for Hong Kong ELS losses announced by the Financial Supervisory Service, it shows signs of deep consideration,” and said, “It seems they have produced a decent outcome.” However, considering various circumstances, lowering the compensation rate more moderately than during Lime cannot be an excuse.

The problem is not the level of compensation but the precedent that violates Article 55 of the Capital Markets Act. As Deputy Prime Minister Choi said, the Financial Supervisory Service worked hard to create a thorough plan. We just hope it was not influenced by the upcoming general election schedule. Last week, Financial Supervisory Service Governor Lee Bok-hyun called the Hong Kong ELS compensation “a one-time event” at a forum. This is a critical issue intertwined with pre-supervision and post-measures. It cannot be resolved as a ‘one-time event.’