The FSC and the FSS announced the finalized measures to improve the regulatory framework on private equity funds on April 24. The final measures are based on the previously introduced plans on February 14, and take into account opinions from experts and stakeholders. While ensuring the autonomy of private equity funds, the measures aim to establish market disciplines and introduce a minimum necessary level of regulations to protect investors and prevent system risks.
BACKGROUND
The private equity fund market has grown significantly backed by the government’s policy promoting its development. However, concerns over investor protection became an issue due to problems of misselling, liquidity management and other unfair and/or unlawful sales practices. Against this backdrop, the government introduced on November 14, 2019 its plans to strengthen investor protection with high-risk investment products to prevent excessive consumer damages to retail investors. Between November 2019 and January 2020, the government conducted a study on the private equity fund market to check potential risks and vulnerabilities, and announced a set of improvement measures on February 14. Based on the previous announcements and after taking into account various expert opinions, the government prepared the below finanlized measures to improve the regulatory framework on private equity funds.
KEY MEASURES
The basic principles of the improvements are largely in line with the previously announced changes with further details added thereafter.
I. STRENGTHENING RISK MANAGEMENT BASED ON MARKET DISCIPLINES
The government will work to establish a foundation in which different market participants and players can provide a supervisory role and ‘checks and balances’ against one another.
II. IMPROVING INVESTOR PROTECTION
The FSC will address vulnerabilities in the structure of funds with a minimum necessary level of regulatory measures to improve investor protection.
III. STRENGTHEN SUPERVISION AND INSPECTION
The financial regulators will bolster the supervision and inspection of the private equity fund market.
► Enhance monitoring for unfair sales practices and strengthen reporting requirements in order to respond properly at appropriate times and take precautionary steps
► Introduce a fast-track revocation of registration system for fund management companies that fail to comply with regulations in terms of their capital and other operational requirements
► Strengthen self-regulatory functions of the Korea Financial Investment Association (KOFIA), which will provide a tailored checklist on fund management companies’ internal control and risk management requirements and carry out regular assessments
FURTHER PLANS
The government will swiftly implement the measures requiring no amendments to the existing laws, such as establishing assessment standards for nonmarketable assets, carrying our inspections on private fund management companies that are considered to be substandard, promoting self-regulatory functions of the KOFIA, etc. For the measures that require amendments to the laws, the government will make use of administrative guidance prior to the amendments becoming effective. The amendments will be announce for public opinion within the second quarter of this year.
* Please refer to the attached PDF for details.