Preventing Another "Myeongnyundang": Government to Restrict Policy Funds for Franchisors Engaging in High-Interest Lending

Myeongnyundang Provided Franchisees with Loans at 12–18% Annual Interest
Regulatory Evasion via 'Split Registration' Also Uncovered
Policy Loan Restrictions, Enhanced Disclosure, and Push for Punitive Damages

The government has taken action to prevent a recurrence of the so-called "Myeongnyundang incident" by addressing the issue of franchisors, who received policy funds, offering high-interest loans to franchisees. The government will restrict the use of policy funds by franchisors that have provided high-interest loans to franchisees and will also work to improve the system to prevent loan companies from evading oversight through "split registration." The disclosure of loan-related information provided to prospective franchisees before signing a franchise agreement will also be significantly strengthened.

Myeongnyun Jinsa Galbi. Myeongnyun Jinsa Galbi official website.

On May 10, the Financial Services Commission and the Fair Trade Commission announced these measures in a plan titled "Response Measures Against Unfair High-Interest Loans by Franchisors Utilizing Policy Funds."

This response follows last year's controversy over high-interest loans involving Myeongnyundang, which operates the unlimited meat franchise "Myeongnyun Jinsa Galbi." At that time, Myeongnyundang was accused of lending start-up funds to franchisees at interest rates in the mid-to-high 10% range through loan companies with special relationships and recouping the principal and interest by including them in ingredient costs.

Government investigations confirmed three cases of high-interest loans to franchisees by franchisors who obtained policy fund loans, as well as one additional case. It was found that Myeongnyundang sourced funds from policy financial institutions such as the Korea Development Bank at low annual interest rates of 3-6%, and then lent them to franchisees at annual rates of 12-18%.

During this process, Myeongnyundang lent hundreds of billions of won to 14 loan companies established by its major shareholders, which then provided loans to franchisees. Notably, some of these loan companies engaged in so-called split registration to evade financial authorities' supervision by keeping their total assets and loan balances below the Financial Services Commission's registration thresholds (total assets of 10 billion won and loan balances of 5 billion won). Policy financial institutions fully recovered their policy loans supplied to Myeongnyundang last month, and all 14 affiliated loan companies voluntarily closed in December of last year, meaning no new loans are currently possible.

It was also found that franchisees paid the franchisor for key supplies such as meat, including their principal and interest payments on loans, and the franchisor repaid the loan companies on their behalf.

Going forward, the government will require policy financial institutions to review whether franchisors have offered loans to franchisees and under what terms when assessing new loans, guarantees, or maturity extensions. If inappropriate lending activities such as high-interest loans are identified, sanctions will be imposed, including restrictions on new policy loans and guarantees, limits on maturity extensions, and demands for installment repayments. In addition, when handling new policy loans or guarantees, a written statement of fact signed by the CEO, detailing loans to and from affiliated companies, will be required.

Disclosure to protect prospective franchisees will also be expanded. The government plans to revise the Enforcement Decree of the Franchise Business Act and related notices to require mandatory inclusion of loan interest rates, repayment methods, repayment conditions, registration numbers of loan providers, and details of relationships between the franchisor and loan providers in the disclosure documents.

Furthermore, to prevent franchisees from being unaware of their own loan repayment status, the government will instruct financial companies to directly notify franchisees, as borrowers, about their principal and interest payments.

Additionally, the government will push for the introduction of a punitive damages system under which franchisors will be required to compensate up to three times the damages if they force franchisees to purchase or transact in non-essential or non-standardized products, resulting in harm. To this end, amendments to the Franchise Business Act are also planned.

To prevent split registration by loan companies, the government is considering expanding the total asset limit regulations, which currently apply to loan companies registered with the Financial Services Commission, to those registered with local governments. The government also plans to amend the Lending Business Act to allow the Financial Supervisory Service to conduct investigations of local loan companies suspected of split registration.

A government official stated, "We will promptly conduct follow-up investigations into franchisors where problems have been identified, and take strict action if any violations of the law are confirmed," adding, "We will also actively support dispute mediation and civil damages lawsuits to help franchisees recover their losses."

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