[The Crisis of P2P] Mass Closures Begin... Financial Authorities Draw the Sword

Acceleration of P2P Industry Exit 5 Months After OnTu Act Enforcement
Strict Interpretation of Interest Rate Limit Regulations
Many Companies Already Below OnTu Act Registration Standards
Investor Losses Inevitable if Closures Continue

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Song Seung-seop] Office worker Song Min-ho (37, pseudonym) invested 240 million won over one year last year through five P2P companies but suffered a loss of 20 million won. Although he earned 6.8 million won in interest income, 28 million won was overdue at two companies. These two companies have virtually ceased operations since the implementation of the Online Investment-Linked Finance Act (OnTu Act), making it highly likely that he will not recover his money. Song said, "I trusted and invested because the financial authorities praised it as innovative finance, but I only suffered losses," adding, "I don't know if I can recover even the principal, let alone earn profits, from the remaining investment."

The exit of peer-to-peer (P2P) companies that pool individual funds to lend to people or companies in need of capital is expected to accelerate. Most companies fail to meet the criteria for inclusion in the regulated financial sector, and the financial authorities have strictly limited interest rates exceeding the legal maximum rate (24%), making mass closures a reality. While some view this as a necessary "sorting out" for the healthy growth of the market, concerns coexist that the scale of damage to investors who invested in the exiting companies could snowball.

According to financial authorities and related industries on the 22nd, the Financial Services Commission has begun a full review of the sanctions imposed by the Financial Supervisory Service on six P2P companies. A Financial Services Commission official said, "We are examining the relevant regulations and violations," adding, "The final disciplinary measures will be decided at the regular meeting next month." Earlier, the Financial Supervisory Service's Sanctions Committee resolved to impose high-intensity sanctions of 3 to 6 months suspension of business on six P2P companies whose combined platform fees and interest rates exceeded 24%.

Industry: "If Financial Supervisory Service's sanctions are finalized, investor damage is a concern"

If the suspension of business is confirmed as per the Financial Supervisory Service's opinion, the companies will undergo a 'forced closure' process. According to the OnTu Act, which came into effect in August last year, P2P companies must register their business with the financial authorities by August, but if they receive a suspension order, they cannot register for three years regardless of the suspension period. The general view is that the companies have very little chance of avoiding sanctions. There is no room for argument regarding the legal maximum interest rate regulation, and there is also a court precedent stating that 'platform fees' should be regarded as interest charged by lenders.

If these companies close, the damage will inevitably fall entirely on the investors. In particular, some large P2P companies are included among those sanctioned this time, leading to forecasts that the scale of damage could exceed hundreds of billions of won.

Although regulations require that loan receivables collection and principal and interest repayment to investors under loan and investment contracts must continue regardless of business conditions, there are criticisms that this is unrealistic. An industry insider said, "If suspension of business and worsening profits lead to employee departures and bankruptcy, investors who lent money will suffer," adding, "There is also a possibility of moral hazard where borrowers think 'I don't have to repay a failed company'."

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