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Korea Clamps Down on Sale of Risky Funds to Individuals

Korea Clamps Down on Sale of Risky Funds to Individuals

(Bloomberg) -- South Korea is cracking down on sales of complex financial products that have caused massive losses for some individual investors.

Banks will no longer be able to sell high-risk private funds and regulators will increase minimum investment amounts for individuals, according to a joint statement from the Financial Services Commission and Financial Supervisory Service. The restrictions came after regulators criticized commercial banks for selling hard-to-understand derivative-linked products to household investors.

Falling interest rates and a sluggish domestic share market have prompted Korean investors to park their money in riskier products such as overseas alternative assets and local derivative-linked funds, putting them at danger of losing big if markets worsen. Controversy erupted this year after derivative products sold mostly to individuals caused some investors to lose almost all of their principal in those funds.

Regulators said that:

  • High-risk products will likely be defined as complex investments with maximum risk of losing 20~30% or more of the principal; private funds that invest in stocks, bonds and real estate and other types of real assets wouldn’t be considered high-risk products;
  • Minimum investment amount for individuals in private funds will increase to 300 million won ($256,000) from 100 million won; for funds whose leverage ratio is 200% or higher, the amount will rise to 500 million won from 300 million won;
  • All individual investors in high-risk products should have time periods to consider the investments, and the elderly -- defined as anyone at age of 65 or higher -- will be required to have such cooling-off periods for all kinds of financial products;
  • Investors in derivative-linked funds tied to overseas market rates had an average loss of 52.7% in the September-October period, and the outstanding amount of such products was 587 billion won as of Nov. 8.

To contact the reporter on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

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