[The Crisis of P2P] Mass Expulsions Become Visible... Investor Losses Expected to Reach Hundreds of Billions

Companies Violating Maximum Interest Rates Likely to Face Consecutive Closures
Investor Losses Expected to Snowball Upon Closures
Calls for "Measures to Protect Investors and Consumers" Grow

Illustration by Youngwoo Lee 20wo@

[Asia Economy Reporter Kim Hyo-jin] The Financial Services Commission has begun reviewing disciplinary actions against six online investment-linked finance (P2P finance) companies that charged interest exceeding the legal maximum rate (24%), raising concerns that a wave of company closures is becoming a reality.

Considering industry practices, this disciplinary action is likely to trigger a surge in additional companies facing sanctions, and many companies are already in a situation where their 'exit' is inevitable.

If this happens, large-scale damages to investors in P2P companies are inevitable. There is speculation that the P2P finance industry itself, which had gained momentum based on the financial authorities' 'innovative finance' policy aimed at expanding the mid-interest loan sector and pioneering investment markets, could be jeopardized.

According to financial circles on the 22nd, the financial authorities are proceeding with the process of bringing P2P companies into the regulatory framework based on the Online Investment-Linked Finance Business Act (OnTu Act), which established the legal basis for P2P finance last August.

The OnTu Act is a financial industry law born 17 years after the enactment of the Loan Business Act in 2002. P2P finance is a service that connects borrowers and investors online.

The OnTu Act stipulates that only companies registered with the Financial Services Commission can operate P2P finance businesses. So far, only five companies have applied for registration. To register, companies must meet capital requirements (500 million to 3 billion KRW), business plans, conflict of interest prevention measures, compliance officers, and IT personnel (two people), among other criteria.

An industry insider said, "Most companies find it difficult to meet these requirements," adding, "From the time the OnTu Act was created, it was widely expected that the vast majority of companies would fall into unregistered and illegal status."

Mass 'Exits' Predicted Due to Registration Requirements

There are rumors inside and outside the industry that the financial authorities will soon conduct strong inspections of overall business operations, including compliance with the maximum interest rate regulations. Another industry insider expressed concern, saying, "Many companies are barely managing their businesses under fragile operational structures, so cases of closures will continue."

The situation in the P2P industry is already deteriorating. According to the Korea P2P Finance Association, the industry's delinquency rate, which was 5.78% in 2018, rose to 8.43% within a year and surged to 10.35% last December.

Among the 44 companies registered with the association, 12 had delinquency rates exceeding 30%, with the highest reaching 89%. Within six months of the OnTu Act's enforcement, 45 companies reported closures to the financial authorities. This accounts for about 20% of the 237 companies surveyed in the first comprehensive investigation conducted by the authorities in September last year. There are also predictions that more than two-thirds of all companies will disappear from the market this year.

What About Investors? Litigation and Confusion Expected

The problem lies with the investors' damages. The loan assets of the companies subject to sanctions this time are estimated to be worth several hundred billion KRW. An industry insider said, "Among the funds managed by these companies, the amount that could lead to investor losses may reach the 100 billion KRW level," adding, "If a wave of closures occurs, the damages will snowball."

There is also an explanation that the entire market could plunge into severe chaos due to large-scale litigation to compensate for damages.

A financial authority official said regarding these concerns, "To bring certain industries that have operated based on practices into the regulatory framework and lay the foundation for sustainable growth, thorough restructuring is inevitable," adding, "We cannot ignore related laws that have been newly created or already exist and leave the industry unattended."

While compliance with regulations is important, voices are emerging that it is necessary to devise ways to preserve the purpose of 'expanding the financial safety net for ordinary people' and minimize damages to investors and other financial consumers.

A financial industry insider said, "The financial authorities once strongly promoted P2P finance as a symbol of innovative finance, and they probably did not entirely fail to anticipate such problems at that time," adding, "It is necessary to prioritize the rights and interests of consumers who boldly invested or traded and to devise various measures."