[Legal Spotlight]➃ Aftermath of the Myungryundang Incident···The Game of Franchise Business Is Changing

Full Re-Examination of Financial Support and Sales Information Use Demanded
"Redesign of Compliance System Unavoidable"

Following the so-called 'Myungryundang incident,' in which allegations were raised that high-interest loans had recently been provided to franchisees using policy funds, the financial authorities and the fair trade authorities have significantly strengthened their management and supervision standards for the franchise industry.

The Financial Services Commission and the Fair Trade Commission recently announced measures to prevent recurrence, deciding to block the franchise headquarters' circumventing financial support structures while also strengthening post-inspection and maturity-extension review standards.

Attorney Son Gye-jun of Daeryun LLC cited as the core of this measure "the point that the supervisory agencies' judgment standard has shifted from the form on the contract to the actual flow of funds and control structure."

Until now, when the franchise headquarters and the financial support entity operated as separate corporations, applying regulation was not easy, but from now on, the source of funds, the interest-rate determination process, and the operational reality will be comprehensively examined to judge whether they are, in effect, the same economic community, he explained.

Accordingly, in the franchise industry, the method of providing financial support using affiliated companies is emerging as a major legal risk factor.

Attorney Son pointed out, "Even if the franchise headquarters operates a financial program through an affiliate, if it is confirmed that it substantially controlled the interest rate or repayment conditions, liability for violating the Lending Business Act and the Franchise Business Act may become an issue."

To prevent this, he advised that the financial support review and fund execution process should be managed separately from the sales organization, and that the interest-rate calculation standard should also establish an objective system linked to market indicators.

The issue of using franchise sales information (POS data) is also emerging as a new regulatory issue.

Some franchises operate loan repayment or settlement systems using franchise sales information, but if the relevant information is shared with financial companies without the franchisee's clear consent, there is a possibility of violating the Personal Information Protection Act or the Credit Information Act.

Attorney Son explained, "Data access rights between the sales organization and the financial company must be clearly separated, and the purpose of data use and the scope of provision must also be specifically stated in the franchise contract and the disclosure document."

The industry expects that this strengthening of regulation will also be linked to the Fair Trade Commission's move to strengthen regulation of essential items.

In particular, the analysis is that when the financial support and logistics supply structures are combined, the FTC may interpret this not as a simple transaction but as a means of the franchise headquarters exercising dominance.

If it is confirmed that essential item purchases were induced on the condition of using a specific financial program, or that a distribution margin was taken, it may be judged an unfair trade practice under the Franchise Business Act, and punitive damages liability of up to three times the amount of damage may arise.

Attorney Son emphasized, "Now, it is difficult to block the complex regulatory risks at the level of merely revising contract wording," adding, "The franchise headquarters must comprehensively inspect its funds, data, and logistics operation systems and reorganize its compliance system."

He continued, "As the government's supervisory standard has shifted to focus on the actual operational structure, building a preemptive internal control system will be the most effective risk management means."

Reporter Jung Ye-jin yejin0311@inews24.com

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[Legal Spotlight]➃ Aftermath of the Myungryundang Incident···The Game of Franchise Business Is Changing (Go)