IBK headquarters in central Seoul (Industrial Bank of Korea)

South Korea’s market watchdog the Financial Supervisory Service said on May 25 that it has ordered the state-run Industrial Bank of Korea to compensate investors for up to 80 percent of the losses they incurred as a result of the lender’s misselling of problematic funds structured by Discovery Asset Management.

The dispute arbitration committee under the FSS set the reimbursement rate for individual investors who signed up for Discovery funds through IBK between 40 percent and 80 percent, the FSS said in a statement.

The lender reportedly sold 361.2 billion won ($321.4 million) worth of the Discovery US Fintech Global Bond Fund and 318 billion won worth of the Discovery US Real Estate Senior Bond Fund between 2017 and 2019. But more than 90 billion won of that amount has remained frozen since February 2019.

If the lender accepts the FSS’ decision and embarks on a compensation process, fund redemption worth an estimated 76.1 billion won is expected to take place.

The committee concluded that IBK is liable for damages in the fund fiasco, saying, “The bank failed to adequately inform customers of its fund products’ potential high risks.

“(IBK) lacked internal controls to prevent the sale of risky fund products and monitor the selling process.”

Under the current regulations, the FSS’ proposed dispute settlement is not legally binding, so if investors or banks do not accept the authority’s decision within 20 days and they refuse to settle, legal proceedings may follow, officials said.

IBK is to consider whether to accept the FSS’ ruling, but no decision has yet been made, the bank said.

IBK CEO Yoon Jong-won has previously expressed his willingness to compensate the victims for their losses.

“We will abide by the FSS’ dispute mediation procedure to minimize the losses suffered by customers due to the fund scandal,” Yoon said during a press conference in February.

Meanwhile, the FSS plans to hold a series of dispute arbitration meetings for other Discovery fund sellers by the end of this year, including Shinhan Bank, Hana Bank, Korea Investment & Securities and IBK Securities.

By Choi Jae-hee (cjh@heraldcorp.com)