P2P raises concerns about fraud

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P2P raises concerns about fraud

The rapid growth of peer-to-peer (P2P) financing under the government’s aggressive fintech drive is increasing the chance of financial fraud and scams, and in response, the Financial Services Commission (FSC) said Monday that it has formed a task force to set guidelines for the country’s fledgling P2P lending market.

As of March, there were 20 P2P lenders in Korea that directly connect lenders and borrowers without intermediation by existing financial companies.

According to FSC data, the total amount of loans issued to individuals and corporations stood at around 72.4 billion won ($62.9 million) as of the first quarter, nearly doubling from a year earlier.

The average loan issuance was 22.1 million won per head. Individual loans on credit accounted for about 85 percent of all P2P lending, the data showed. About 6 percent of individual borrowers took out loans from P2P businesses, taking their properties as collateral.

“The P2P lending industry is growing at a rapid pace, centering on the growth of loans based on individuals’ credit or real estate collateral,” the FSC said in a statement.

According to the Financial Supervisory Service (FSS), there have been a number of reports by consumers who claim that they were lured by unknown, possibly illegal P2P financing businesses.

A 45-year-old CEO of an IT software provider, surnamed Choi, told the Korea JoongAng Daily that he was persuaded to invest in a self-called P2P lending firm based on the company’s properties.

“I was introduced to the company by one of my acquaintances and heard it was a thriving P2P lender that attracts quite a lot investors as it promises 15 percent returns annually,” Choi said.

The FSS has reported such complaints by consumers to police and prosecutors and said it will enhance monitoring on similar practices.

“Since financial programs using new techniques and business models under the fintech initiative are going to be introduced more widely, there are higher possibilities of consumers being exposed to the risk of new forms of financial fraud,” said Kim Sang-rok, head of anti-illegal financial service at the FSS.

In the United States in May, the world’s No. 1 P2P business, Lending Club, was embroiled in a scandal that ousted its founder, Renaud Laplanche, as he sold about $220 billion worth of loan obligations to an institutional investor without any notice of risks related to the investment. Since most P2P loans are issued to borrowers with low credit levels, investment in such businesses carry high risks.

And in China, where P2P lending has shown explosive growth in recent years, there are increasing reports of lending scams, fraud and personal information leaks, the FSC said.

The FSC plans to announce a set of guidelines, including restrictions on the exaggeration of guaranteed yields and false advertisement, as well as stricter rules on information notification and consumer protection, by September and implement the plan starting in October.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]
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