South Korea Cracks Down on Franchise Loan Abuse After Myungryundang Scandal

Context The Fair Trade Commission (FTC) and the Financial Services Commission (FSC) announced a response plan targeting “quasi‑lending” – a practice where franchise headquarters borrow cheap government policy loans and re‑lend them at steep rates. A survey of franchise firms from October to January identified three cases of such abuse, prompting a regulatory overhaul.

Key Facts - Myungryundang received roughly 83 billion won in policy funds at 3‑6 % annual interest from Korea Development Bank, Industrial Bank of Korea and the Korea Credit Guarantee Fund. - The company transferred about 89.9 billion won to 14 affiliated lenders owned by its major shareholder. Those lenders then issued 145.1 billion won in loans to Myungryundang’s franchisees at 12‑18 % interest. - The FTC’s examination report recommends corrective orders, fines and a possible criminal referral for violations of the Franchise Business Act, citing forced use of specific suppliers and misleading disclosures. - New rules will require policy lenders to scrutinize loan terms, limit extensions on suspect loans and enforce installment repayment. Disclosure documents must list interest rates, repayment methods, lender registration numbers and any related‑party status. - Authorities will also force financial firms to inform franchisees directly about principal and interest payments, and will examine revenue‑linked repayment schemes that obscure borrowers’ true obligations.

What It Means The crackdown signals a shift from tolerating franchise‑headquarter financing to treating it as a regulated credit activity. By tying policy‑fund eligibility to transparent loan practices, the government aims to protect small business owners from predatory rates that can exceed the original borrowing cost by more than double. The FTC’s push to amend the Franchise Business Act could impose punitive damages up to three times the loss suffered by franchisees, creating a strong deterrent against forced supplier contracts and hidden financing.

Future monitoring will focus on whether franchise headquarters continue to channel policy funds through related parties or adopt “split registration” tactics to evade oversight. Watch for the first set of enforcement actions under the revised decree and the impact on new franchise financing agreements.