Loan Business Re-registration to Become Stricter... "Will Prevent Reckless Exit and Re-entry" (Comprehensive)

Restriction on Re-registration for Closed Loan Businesses Extended from 1 Year to 3 Years
New Provisions Introduced for Human Capital and Terms Change Reporting Obligations
Number of Small Loan Companies Affiliated with Local Governments Expected to Decrease

[Asia Economy Reporter Song Seung-seop] A plan is being promoted to extend the restriction period for loan sharks to re-register after closing their business from 1 year to 3 years, strengthen personal requirements, and establish penalty provisions for the obligation to disclose terms and conditions.

Extending the re-registration restriction period and regulating human capital

On the 24th, Yoo Dong-su, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, officially proposed a partial amendment bill to the “Act on Registration of Loan Business and Protection of Financial Consumers” containing these details.

The amendment mainly aims to extend the re-registration restriction for loan sharks who have closed their business from 1 year to 3 years. This is to prevent reckless re-entry by loan sharks and brokers. Some loan companies have been buying large amounts of loan claims and then closing their businesses to operate as creditors under civil law. Debt collectors are required to employ at least 20 full-time staff, but some exploit the fact that creditors under civil law can also perform collection tasks to evade financial authorities’ regulations. If the bill passes, such indirect operations will become difficult.

The extension of the loan business re-registration period has been a matter of ongoing discussion by authorities. In 2017, the Financial Services Commission announced a “Plan to Strengthen Supervision of Loan Businesses,” stating that the re-registration ban period would be extended from the current 1 year to 3 years, but it was scrapped. The relevant bill was also proposed during the 20th National Assembly but was automatically discarded due to the expiration of the term.

Registration requirements will also be strengthened. Currently, anyone can work as a loan shark as long as they have the “social credit” defined by Presidential Decree. They only need to have no criminal record for violating financial laws or no history of being designated as a failing financial institution. The amendment changes “social credit” to “personnel and social credit.” It forces loan companies registering with the Financial Services Commission to possess certain human resources when entering the market.

Will the number of small-scale loan businesses with loose regulations decrease after the amendment passes?

Depending on the level of human resources required by the Presidential Decree, it is expected that many companies will fail to comply with the law. An industry insider said, “Large companies with strong business capabilities will not be greatly affected by the amendment,” but added, “If the scope expands to appointing compliance officers without distinguishing separate capital requirements, small-scale loan businesses in local areas will inevitably suffer significant damage.”

According to the Financial Supervisory Service, there are currently 10,164 registered loan companies. Among them, 1,311 are registered with the Financial Services Commission, corresponding to those engaged in debt collection, having assets exceeding 10 billion KRW, or operating in two or more cities/provinces. The remaining 8,853 are affiliated with local governments, equipped only with small capital and on-site offices. This is why there is an analysis that the industry is likely to be rapidly reorganized by this amendment.

Additionally, loan sharks will be obligated to report to the Financial Services Commission within 10 days if they revise or establish terms and conditions. Matters that significantly affect the rights or obligations of financial consumers must be reported in advance before changes. The reported content will be notified to the Fair Trade Commission through the Financial Services Commission. If the terms established by the company are judged to potentially harm consumer interests, the Financial Services Commission can order changes to the clauses. Failure to properly implement these regulations may result in fines of up to 30 million KRW.

The status of the Korea Loan Finance Association, the statutory association for loan businesses, will also be strengthened. This is because the amendment includes a provision allowing the association to establish or amend standard terms and conditions to establish sound transaction order and prevent unfair use of terms. This means that terms established by the association itself will have a legal basis.

Representative Yoo said, “The loan market is a place that lends high-interest funds to low-credit and low-income vulnerable groups,” emphasizing, “The current law’s low regulatory level has consistently pointed out reckless withdrawal and re-registration of loan brokers.” He added, “We will strengthen entry regulations into the loan market and secure the effectiveness of the supervisory system by addressing deficiencies.”