Peer-to-peer lenders plan to self-regulate

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Peer-to-peer lenders plan to self-regulate

Some of Korea’s leading peer-to-peer (P2P) lending firms are setting higher standards for themselves to protect clients and restrict access to risky investments in an unregulated industry that’s prone to fraud.

On Monday, the Preparatory Committee of the Digital Finance Association announced a series of self-imposed regulations that it plans to apply to all member companies when the association kicks off later this year.

Lendit, 8percent and Popfunding, the three P2P firms in the preparatory committee, left the older Korea P2P Finance Association in May along with other firms due to disagreements over its management direction.

In Korea, P2P firms, which connect borrowers with investors through online platforms, are not under the direct supervision of financial authorities. The Financial Services Commission indirectly supervises them by requiring the registration of P2P firms’ lending subsidiaries, but not all P2P firms have these subsidiaries.

In recent years, peer-to-peer lending start-ups have grown increasingly popular. They offer cheaper services than traditional financial institutions, meaning lenders can earn higher returns and borrowers can borrow at lower interest rates.

After reviewing research results and expert advice, the preparatory committee proposed the following regulations for potential members.

All association members must “manage investor funds and borrowers’ interest payments in separate accounts to safeguard customers’ funds” in case of bankruptcy and other unforeseen events, the statement read. The measure is also intended to discourage members from wrongfully appropriating funds.

The member firms will also have to regulate the risk of the investment opportunities they offer. For example, they may limit the ratio of construction project financing loans to 30 percent of total loans. No limitations will be applied to mortgages or unsecured loans made by individuals or small business owners.

Members will also be required to create investor guidelines, register their lending subsidiaries with the Financial Supervisory Service and abide by P2P lending guidelines set by the Financial Services Commission. They will have to undergo external audits and publish the reports every March.

As one of its first external activities, the preparatory committee is preparing to host a seminar with the Korea Internet Corporations Association later this month to discuss the transformative effects of P2P finance on modern society.

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