South Korea is awash with mutual funds that don't make money. This summer, regulators have taken the first step to allow asset managers to get rid of the least profitable of these.

Seoul-based regulator the Financial Supervisory Commission has approved a new rule that allows a fund house to close a fund that has less than W5 billion ($4.1 million) of assets. The original proposal was to close funds with assets under management of W10 billion ($8.2 million) or less, but industry executives say opposition among securities firms led to this being watered down at the last minute.

Technically speaking, fund houses have always been able to close a product, if they notified all the unitholders. But for retail products, the asset-management company usually does not have this data, as it's the property of the distributor. The new rule allows a fund house to simply make a public announcement that it intends to shutter a product.

Securities companies are important distributors in Korea and wield more influence than the fund houses. The burden of informing customers that an existing product is to be shut down, and deciding what to do with the assets still there, falls on the distributors. Therefore the securities firms don't like the idea of fund houses being given the legal right to close products unilaterally.

"There will be resistance from distributors, so we have to find a way to soften the blow," says one chief executive at a foreign fund house. "And most of the banks with affiliated asset managers may not do it at all."

Another executive says progress will remain limited, unless a big local player decides to close its loss-making funds.

One impediment is that, unlike in most markets, Korea does not allow funds to be merged.

The new rules around fund closures are seen by industry executives as a sop to fund managers after the distributors pushed through a ruling last year that shifted the cost of printing and mailing quarterly reports from the mutual fund's board of directors to the fund provider. This saw costs for fund managers rise, including on the thousands of funds that languish with less than W10 billion of assets.