P2P investment gets its own legal framework

The financial services will now have complete oversight over peer to peer (P2P) investment after the National Assembly passed a raft of new laws on Friday.

Currently, P2P investment is not under the direct supervision of financial authorities, but the financial regulators indirectly supervise through with a set of guidelines.

Under the new regulatory framework, which will come into effect next year, companies will have to have at least 500 million won ($428,954) in capital to run a P2P business.

P2P lending platforms will be required to manage investor funds and borrowers’ interest payments in separate accounts to safeguard them in case of bankruptcy or other unforeseen events.

The maximum lending rates, the bill said, won’t surpass 24 percent, as is the case for smaller consumer financial companies.

Under the law, a set of measures will be introduced with the aim of insulating investors’ funds from the risk of P2P companies going bankrupt.

Another notable change is that lenders will be allowed to receive investments from financial institutions, previously prohibited.

The Financial Services Commission said that the law is intended to reduce legal uncertainties surrounding the P2P business.

“The passage at the National Assembly will address legal uncertainties about the P2P industry and form a legal basis to embrace new, innovative approaches,” the regulator said in statement.

The operators of P2P lending platforms welcomed the move as the associations representing the sector have pushed for more regulation of the emerging financial sector as the lack of a regulatory framework hampers further growth.

“It is meaningful because it marks the first case in the world where the sector has a separate law, instead of falling under several rules and guidelines,” said a spokesperson of a preparatory committee for the P2P industry.

There are currently two bodies representing the industry - the Korea Internet Corporations Association and Korea P2P Finance Association.

But the associations should be merged into one under the new bill and any unit interested in operating a P2P platform should be enrolled in the group.

“There are some 220 P2P companies registered with the Financial Services Commission,” the spokesperson said, “[The preparatory committee ] needs to bring together the players to undertake coordinated steps.”

P2P investment transactions have enjoyed a steep rise with total investments at 6.2 trillion won as of June, despite worries over the default ratio.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]