Illegal and Poor Practices Lead to Soaring Delinquency Rates... Financial Authorities Urge Caution in P2P Investments

[Asia Economy Reporter Kim Hyo-jin] Financial authorities have repeatedly warned investors to be cautious about P2P (peer-to-peer) investments. This is because warning signs have appeared, with the delinquency rate rising to 16.6%.

On the 4th, the Financial Services Commission and the Financial Supervisory Service urged, "Considering that the P2P loan delinquency rate is continuously increasing and some companies are engaging in unhealthy and illegal activities such as using investment funds to roll over loans, it is necessary to carefully decide on P2P investments."

According to financial authorities, based on disclosure data from Midrate, a P2P-related company, the delinquency rate of 141 P2P companies steadily increased from 5.5% at the end of 2017 to 10.9% at the end of 2018, and 11.4% at the end of last year. As of the 3rd of this month, the delinquency rate rose to 16.6%.

Some companies have been found to offer false products, provide inadequate disclosures, and lure investments into potentially poor-quality products using rewards as bait.

The financial authorities stated, "Ahead of the enforcement of the Online Investment-Linked Finance Act (OnTu Act), we are closely monitoring companies conducting excessive investment events," and added, "We plan to strengthen on-site inspections and take strict measures if there are suspicions of fraud or embezzlement."

They also urged investors to sufficiently verify the investor protection measures contained in the law even before its enforcement, and after the law takes effect, to confirm whether the company is registered, in order to reduce investor damage.

The OnTu Act, which will be enforced on August 27 this year, provides the legal basis for P2P finance and includes investor protection measures such as information provision, restrictions on handling high-risk products, prohibition of loss compensation, and excessive rewards.

Existing P2P companies can defer registration for one year after the law takes effect. Financial authorities announced, "We will focus inspections on companies that delay registration without special reasons and plan to issue consumer alerts advising caution in transactions with unregistered companies."

The financial authorities issued consumer alerts in November last year and March this year, stating that P2P products are high-risk products that do not guarantee principal.