Purchased Debt Collection Business to Shift to Licensing System... All but Top 30 Firms to Exit in Three Years

Financial Services Commission Holds "Inclusive Financial Reform" Meeting

Blocking "Predatory Collection" by Raising Entry Barriers for Debt Collection Businesses

Stricter Requirements for Capital and Personnel; Money Lending Side Businesses Prohibited

Purchased Debt Collection Sector Expected to Consolidate from 911 to Around 30 Firms

Existing Operators to Transition to Licensing System After Three-Year Grace Period

The government will fully convert the "purchased debt collection business," in which companies buy non-performing loans (NPLs) from financial institutions at a steep discount and collect on them, from a registration-based system to a licensing system. In principle, purchased debt collection businesses will be banned from engaging in money lending or other side businesses, and existing operators will be granted a three-year grace period. As controversy has grown recently over so-called "predatory finance" regarding the collection of long-term delinquent debt, the government has announced its intention to restructure the market around high-quality firms.

On May 28, the Financial Services Commission held a meeting on "Inclusive Financial Reform" at the Credit Recovery Committee's Integrated Support Center for Inclusive Finance, chaired by Finance Committee Chairman Lee Okwon, and announced plans to transition to a licensing system for purchased debt collection businesses as the main agenda item.

The core of this reform is the full transition of the purchased debt collection business from a registration-based to a licensing system. The government's push for a licensing system stems from a proliferation of operators and indiscriminate collection practices in the market. Currently, there are 911 purchased debt collection companies registered with the Financial Services Commission, but only 498 of them (55%) actually hold purchased delinquent debt. Among these, 177 companies hold more than 100 delinquent cases, and the top 30 companies account for 86% of the total outstanding balance. With the introduction of the licensing system, the currently overcrowded sector is expected to consolidate to around 30 companies going forward.

By introducing licensing requirements similar to those for debt collection businesses, the Financial Services Commission will now require that: ▲ more than 50% of the business is funded by a financial institution; ▲ the company maintains a minimum capital of 3 billion won; and ▲ a sound and reasonable business plan is in place. In addition, major shareholders must demonstrate financial soundness, social credibility, sufficient investment capacity, and expertise to qualify for a license.

Requirements for personnel and facilities will also be significantly strengthened. Since legal actions such as compulsory enforcement are possible in third-party collection processes, companies must employ at least 20 full-time staff, including at least 5 legal professionals such as lawyers. The eligibility criteria for executives and employees will also become more stringent. If a person has been sentenced to imprisonment or a more severe penalty, at least five years must have passed since the completion or exemption of the sentence. For those who have been fined for violations of the Lending Business Act, the Debt Collection Act, or the Credit Information Act, they will only be allowed to work in the industry five years after sentencing. Companies will also be required to have IT security infrastructure to protect sensitive information.

Restrictions on side businesses will also be significantly tightened. Until now, except for gambling-related industries, karaoke bars, entertainment bars, and multi-level marketing, it was possible to engage in other lines of business. However, in the future, side businesses will be fundamentally prohibited except for those specifically permitted by law. In particular, to prevent conflicts of interest with debtors, it will not be allowed to operate a lending or loan brokerage business, or to run a money lending or loan brokerage operation alongside purchased debt collection.

However, certain work that requires professional expertise, such as NPL securitization, or ancillary work essential to conducting purchased debt collection, will be exceptionally allowed.

Alongside these changes, the government will also revise relevant regulations to enhance the professionalism of purchased debt collection businesses and strengthen protections for debtors. The plan is to require not only compliance with the Debt Collection Act and the Personal Debtor Protection Act, but also to ensure that internal rules and actual collection procedures fully incorporate the guidelines for debt collection.

Existing purchased debt collection businesses will be granted a three-year transition grace period. During the grace period, if the current registration term expires, it can be renewed once, but the renewal period must also fall within the overall grace period. If a company fails to obtain a license within the transition period, it must transfer its held delinquent debt to another financial institution or a licensed purchased debt collection company within six months of the end of the grace period.

The Financial Services Commission plans to prepare an amendment to the Lending Business Act in August and to push for its passage in the National Assembly within the year.

Chairman Lee stated, "Purchased debt collection plays a vital back-end role in the lending system, but concerns have been consistently raised about long-term or excessive collection targeting vulnerable borrowers. Although debt collection is a legitimate right of creditors, if it imposes excessive burdens and suffering on debtors over a long period in a way that is socially unacceptable, the legitimacy of the business is difficult to justify." He emphasized, "We will fundamentally change the structure of the non-performing loan sale and collection market from one focused on maximizing debt recovery to one that internalizes debtor protection."

This content was produced with the assistance of AI translation services.