S.Korea bank ordered to share investor fund losses

SEOUL, Nov 12 (Reuters) - A South Korean regulator has ordered a domestic bank to cover half of the losses suffered by an investor on a fund it sold due to its failure to explain the product's risks, in a decision that could pave the way for more such cases.

The verdict, handed down by the Financial Supervisory Service (FSS) on Tuesday, was the first of its kind in the country since the booming mutual fund market fizzled out this year, hit by the global credit crunch and tumbling stock markets.

The FSS decision may prompt a flurry of similar cases by individual investors who have switched from bank accounts into mutual funds since 2005 on the hopes of higher returns. The regulator has already received over 100 complaints related to the same investment product.

"The bank did not provide explanatory notes to the investor, who had no experience with buying funds, when it sold the derivatives investment product," the FSS said in a statement.

"It also told the investor that the fund had almost a zero chance of losing the principal sum, leading the buyer to mistake it for a bank deposit in which the principal payment was guaranteed."

Woori Bank spokesman Jung Heekyung said on Wednesday it had raised 150 billion won ($113 million) through the fund, named Power Income, in November and December 2005.

The fund had lost about 80 percent of its value as of Tuesday because of its exposure to U.S. subprime mortgage assets, including Fannie Mae (FNM.P) and Freddie Mac (FRE.P), which were seized by regulators in September after the two largest U.S. mortgage finance companies faced mounting losses.

"Upon receiving the (FSS's) mediation order, which is not legally binding, we will decide whether to accept it or not," Jung said by telephone.

The bank is the main arm of the country's No. 2 financial services firm Woori Finance Holdings (053000.KS).

Appealing or ignoring the FSS order means the issue would develop into a court dispute.

An FSS official said the decision followed a request by an individual investor, identified only as a 58-year-old housewife, and marked the first time that the regulator required compensation for as much as half of an investor's losses on a fund.

Shares in Woori Finance fell 4.2 percent to 6,470 won by 0131 GMT, underperforming a flat wider market .

(Reporting by Kim Yeon-hee; Editing by Jonathan Hopfner)