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[Asia Economy Reporter Song Seung-seop] Whether financial companies participating as institutional investors in online investment-linked finance businesses (On-tu businesses) should be regarded as ‘investors’ has emerged as a contentious issue in the industry. If they are defined as ‘lenders,’ controversies arise over whether financial companies must directly manage risks and whether they should be included in total loan volume regulations. While financial authorities are deliberating on related matters, On-tu businesses are concerned that low participation by institutional investors could hinder industry growth.
According to the industry on the 20th, financial authorities are currently adjusting details related to private financial companies’ investments in On-tu businesses. They are reviewing interpretations of legal provisions, the nature of investments, and the scope of regulatory application.
The core issue is whether financial companies’ investments in On-tu businesses constitute loans. The On-tu business structure directly connects borrowers and investors. If a financial company becomes an On-tu investor, it merely goes through a platform, but effectively executes loans to financial consumers.
Currently, the On-tu Act regards investments by financial companies in On-tu businesses as credit. Article 35 of the On-tu Act states that unless otherwise specified by laws governing each financial sector, joint investments with credit financial institutions are considered ‘loans or credit extensions.’
The problem is that if these are viewed as loans, financial companies must comply with stringent legal regulations. Under current law, financial institutions must adhere to ‘individual borrower credit limits’ and ‘debt service ratio (DSR) regulations’ when lending money. If loan regulations apply, financial companies are likely to avoid investing in On-tu businesses.
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Legal conflicts also arise. The moment a financial company executes credit, it has an obligation to manage risk. To manage this, it must know the information of the borrower, but the On-tu Act prohibits providing borrower information. This is why savings banks and mutual finance sectors, which had shown interest in On-tu investments, hesitate to participate as institutional investors.
How to apply guidance or recommendations from financial authorities, rather than laws, is also an issue. Currently, each financial sector regulates total loan volume according to authority guidelines. If funds invested in On-tu businesses are interpreted as loans, they are likely to be included in the total loan volume.
The On-tu industry is wary of financial institutions’ investment activities being interpreted as loans. A representative of an On-tu company said, “Most countries regard financial institutions’ participation in On-tu businesses as investments,” adding, “If the participation of financial companies, which was considered a key to growth, becomes difficult, financial innovation development will also slow down.” It is reported that the On-tu Association is currently conveying opinions and coordinating with financial authorities on related matters.
Accordingly, the Financial Supervisory Service (FSS) inquired multiple law firms for legal advice on the matter, but it is known that differing opinions emerged among the firms. The issue has not been decided at the FSS level and has been reported to the higher authority, the Financial Services Commission.
An FSS official explained, “If it were a matter of legal interpretation, the authorities might resolve it, but there are also conflicts between laws. While there are voices that it should be regarded as investment in line with the purpose of On-tu businesses, the law is currently ambiguous, and there is a clear potential problem, so we are waiting for an internal judgment.”
Platform regulations by financial authorities are also unfavorable for the industry. Recently, financial authorities issued a regulatory interpretation that P2P investment services by platform companies such as Kakao Pay and Toss constitute ‘intermediation.’ Platform companies had previously claimed these were merely ‘advertisements.’ However, due to concerns over violations of the Financial Consumer Protection Act and other reasons, various regulations were applied, leading to the suspension of related services across the board.
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