The Financial Supervisory Service is pushing for institutional reforms to ensure that the investor perspective is sufficiently reflected from the fund design and manufacturing stages, in order to prevent investor losses arising from the management of overseas real estate funds.
On December 4, the Financial Supervisory Service announced that it had held a meeting with the chief executive officers of major asset management firms operating overseas real estate funds, where they discussed improvement measures focused on strengthening the fund due diligence and investment review systems.
The Financial Supervisory Service pointed out that its recent internal inspection of overseas real estate funds uncovered cases of inadequate management and verification during the manufacturing and design stages of these funds.
There were cases where there was a lack of qualified criteria for evaluating the capabilities and financial status of local asset management companies, or where due diligence reports merely introduced market overviews without sufficient analysis and assessment of asset-specific risk factors.
In addition, during investment reviews, there were instances where response plans for major risk factors and comparative reviews of contract terms were omitted. The agency also noted a strong tendency toward overly optimistic assessments, such as setting unrealistically narrow ranges for sensitive variables like occupancy rates, interest rates, and exchange rates.
Based on the inspection results, the Financial Supervisory Service plans to require the mandatory submission of due diligence inspection reports when filing fund registration statements. This will ensure that asset management companies document which risk factors have been identified and how they have been assessed, and attach this information to the registration statement at the fund launch stage.
Additionally, the agency will establish a standard format for disclosing key investment risks of overseas real estate funds. This standard will enable ordinary investors to intuitively recognize the typical investment risks of such funds. The agency also plans to make it mandatory to include scenario analysis results, such as quantifying and intuitively presenting the maximum potential loss investors may incur under different circumstances when making investment decisions.
Furthermore, the Financial Supervisory Service will introduce a focused review system for overseas real estate funds by designating multiple reviewers and raising the approval authority for registration statements, in order to conduct more thorough examinations.
Suh Jaewan, Deputy Governor of the Financial Supervisory Service, emphasized, "The industry itself must first thoroughly re-examine and rectify all work procedures from the investor's perspective," adding, "We will not tolerate any behavior that merely pays lip service to the model rules, which are the minimum standards established to restore fiduciary duty and trust."
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