Firms with 100 billion won or more in prepayments must set up investment review committees

High-risk investments such as virtual assets subject to prior screening

External opinions required for transactions with related parties

Prepaid installment businesses — including funeral service providers — that hold 100 billion won ($75.4 million) or more in customer prepayments will be required to establish and operate an investment review committee. They must also conduct thorough due diligence on transaction size, terms and recoverability of funds before investing in high-risk assets such as virtual assets or entering into deals with affiliates.

The Korea Fair Trade Commission said it will begin enforcing revised guidelines on consumer protection in prepaid installment transactions starting Friday.

The Korea Fair Trade Commission at Government Complex Sejong in Eojin-dong, Sejong [Newsis]
The Korea Fair Trade Commission at Government Complex Sejong in Eojin-dong, Sejong [Newsis]

The revision adds new precautions on prepayment management to the existing guidelines and spells out internal control procedures covering investment review and risk management. Previously, the guidelines only recommended that companies avoid making loans or investments for the benefit of major shareholders or affiliates, and that they secure sufficient funds to cover service delivery and cancellation refunds.

Under the revised guidelines, funeral prepayment firms must balance stability, liquidity and profitability when managing customer prepayments. Particularly scrutinized will be excessive investment in high-risk assets — such as derivatives, virtual assets and leveraged financial products — made with full knowledge of the high probability of principal loss.

Also subject to review are transactions in which a company guarantees the debts of a controlling shareholder or related party, provides collateral on their behalf, or offers excessive benefits to affiliates on terms that deviate from standard market conditions. Before entering into any such transaction, firms must thoroughly examine the size and terms of the deal as well as the likelihood of recovering the funds.

Internal control procedures for prepayment management will also be strengthened. Funeral service companies must draw up prepayment management guidelines specifying the permissible scope of investments, investment review procedures and risk management measures. They will also be required to establish liquidity management, investment and risk management plans for each fiscal year — or an equivalent period — and report them to their boards of directors.

Companies whose prepayments at the end of the immediately preceding fiscal year totaled 100 billion won or more must establish and operate a prepayment management review committee. When such a committee reviews transactions with related parties — including controlling shareholders — or investments in high-risk assets, it must seek opinions from executives or employees of payment-guarantee institutions such as mutual aid associations and banks, as well as external specialists in accounting and finance.

The Fair Trade Commission said it plans to urge industry compliance with the revised guidelines through sector consultations and other meetings, and to encourage funeral service companies to voluntarily establish robust internal control systems.


y2k@heraldcorp.com