[Square] The Meaning Contained in Article 35 of the 'Ontu Act'

Kim Sung-jun, CEO of Lendit

It has been one week since the "Online Investment-Linked Finance Business and User Protection Act (OnTu Act)" came into effect. The OnTu Act is significant as the world's first standalone law specifically for peer-to-peer (P2P) finance. It is recognized as a new financial industry law in the domestic financial sector, marking the first such legislation in 17 years since the enactment of the Loan Business Act in 2002.

Since 2015, the domestic P2P finance industry has rapidly developed, and with the enactment of the OnTu Act, it has finally been recognized as a financial industry called "online investment-linked finance business," alongside traditional financial sectors such as banking, securities, and insurance. This marks the dawn of a new era of technology-based financial industries.

The OnTu Act defines and specifies key issues such as industry soundness, consumer protection enhancement, and new industry promotion. It outlines the definition of the OnTu business, registration requirements, rules for business conduct, mandatory and prohibited actions throughout the service, and the supervision, inspection, and penalties under the law if these are not followed.

Among these, there is a provision that has attracted attention not only from the P2P finance sector but also from traditional financial institutions. This is Article 35, the "Special Provisions on Linked Investments by Financial Institutions." This article allows various financial companies such as banks, securities firms, and specialized credit finance companies to make linked investments in loans handled by P2P finance companies.

The content of Article 35 of the OnTu Act reflects a major global trend in alternative finance development. According to a report published in April by the Cambridge Centre for Alternative Finance at the University of Cambridge in the UK, 83% of P2P personal credit loans are funded by alternative investments from financial institutions. For P2P corporate credit loans, 57% involve alternative investments from financial institutions, and although real estate loans have a smaller share compared to credit loans, 44% of investments come from financial institutions' alternative investments.

Even when P2P companies directly lend funds they have raised, 93% of personal credit loans are made through alternative investments by financial institutions, and more than half?68%?of corporate credit loans are invested in by financial institutions.

The reason financial institutions make alternative investments in loans handled by P2P finance is that it allows them to indirectly handle mid-interest rate loans. They pursue credit loan strategies through partnerships with P2P companies that possess new evaluation models based on technologies such as big data analysis and machine learning. Particularly in the UK, the birthplace of P2P finance, and the advanced market of the United States, governments and financial companies collaborate with P2P firms in various ways to activate the supply of mid-interest rate loans and support financial services for ordinary citizens.

A representative example is the British Business Bank. Since March 2013, the British Business Bank has invested a total of 165 million pounds (approximately 243 billion KRW) in loans handled by the P2P finance company Funding Circle. In 2018, it set an additional policy fund of 150 million pounds (approximately 220 billion KRW) to invest in small business loans within the UK. It also invested 15 million pounds (approximately 2.2 billion KRW) in MarketInvoice in 2013 and 10 million pounds (approximately 1.5 billion KRW) in RateSetter in 2014. This bank was established by the UK government to strengthen financial support for small and medium-sized enterprises. In line with its founding purpose, it strategically makes alternative investments in various P2P platforms to activate mid-interest rate loans.

Linked investments are also expected to play a significant role in consumer protection. For linked investments, financial institutions' professional risk management organizations thoroughly review the P2P companies' loan screening capabilities, bond management, and internal controls. In the Anglo-American markets, the start of linked investments by financial institutions has led to a significant increase in participation by individual investors.

The registration application for OnTu businesses will soon begin. After review by financial authorities, registered companies are expected to emerge within the year. Given the long time taken to enact this law, it is hoped that consumer protection will be strengthened and industry trust restored. Furthermore, it is hoped that the domestic P2P finance industry will take this opportunity to leap forward in line with global industry trends.

Kim Seong-jun, CEO of Lendit

This content was produced with the assistance of AI translation services.