The Fair Trade Commission (FTC) has launched deliberation proceedings against Myungryundang, the operator of the "Myungryunjinsa-Galbi" barbecue franchise, over alleged violations of the Franchise Business Act. The FTC plans to pursue broader regulatory reforms together with the Financial Services Commission (FSC) targeting franchise headquarters' schemes of using policy funds for high-interest lending.
The FTC said Friday that it had sent an examination report to Myungryundang on Wednesday containing recommendations for corrective orders, fines, and a criminal referral, and had submitted the case to the commission. The FTC conducted its investigation over approximately eight months from September last year through April this year, on suspicions that Myungryundang received low-interest funds from policy financial institutions such as Korea Development Bank (KDB) and then channeled high-interest loans to franchisees through loan firms established by its major shareholder.
According to the investigation, Myungryundang received policy funds at annual interest rates of 3 to 6 percent from KDB (79 billion won), the Industrial Bank of Korea (2 billion won), and the Korea Credit Guarantee Fund (2 billion won). The company then lent approximately 89.9 billion won to 14 specially related loan firms established by its major shareholder, and these firms extended loans totaling 145.1 billion won to Myungryunjinsa-Galbi franchisees at annual interest rates of 12 to 18 percent.
More than 900 Myungryunjinsa-Galbi outlets, including those that have since closed, reportedly took out loans through this scheme. The share of franchisees that borrowed money when opening their stores was estimated at around 90 percent.
The FTC determined that Myungryundang effectively forced franchisees to use specific interior contractors and equipment and furnishings suppliers when opening their stores, and made them bear costs that exceeded the amounts actually paid. The company is also accused of directly providing credit to franchisees or arranging loans from financial institutions, while marking these items as "not applicable" in its disclosure documents and omitting or concealing information on lending terms and matters related to specially related parties.
In particular, the FTC said it had identified signs of so-called "split registration," in which some loan firms divided their asset size to below 10 billion won to evade supervision by financial authorities. Thirteen of these loan firms voluntarily shut down in December last year, halting new lending.
The FTC plans to use this case as an opportunity to overhaul regulations on the overall structure of high-interest lending by franchise headquarters. The FTC and the FSC jointly announced countermeasures the same day, stating that policy fund support will be restricted for franchise headquarters that provide high-interest loans to their franchisees. The agencies will intensively review the franchisee lending status of franchise headquarters and their affiliates during the screening of new policy loans and guarantees as well as maturity extensions, and will impose restrictions on maturity extensions or require installment repayments if problems are identified. They will also push to amend the enforcement decree of the Franchise Business Act to make it mandatory to disclose loan interest rates, repayment methods, the relationship between the credit provider and the franchise headquarters, and moneylending registration numbers in information disclosure documents.
Oversight will also be strengthened over structures in which principal and interest are repaid in linkage with franchisee sales, or in which loan principal and interest are added to payments for mandatory supply items. Financial firms will be required to notify franchisee borrowers directly of principal and interest payments, and unreasonable loan contract terms will be revised.
"We will swiftly pursue regulatory improvements to ensure that policy funds are not used for purposes different from their original intent or result in damage to franchisees," an FTC official said. "If legal violations are confirmed, we plan to take strict action."
