In an effort to tighten its grip on high-risk financial products in a volatile market, South Korea’s financial authorities will be placing a cap on peer-to-peer investments.

The regulatory Financial Services Commission and watchdog Financial Supervisory Service on Monday unveiled the enforcement regulations for a forthcoming act on P2P lending, which will take effect starting Aug. 27.

Under new rules, individual investors may invest up to 30 million won ($24,500) in P2P products and up to 10 million won in realty-related products.

“In the prior announcement of legislation, the overall investment cap was 50 million won but we have decided to slash the amount, taking into account the increased level of credit risks amid the fallout of COVID-19,” officials said.

As for P2P companies, they will have to make a management disclosure when their default rate exceeds the designated 15 percent mark and submit a risk management report when the figure surpasses 20 percent.

In the case of real estate project financing products, lenders are required to specify the developer and constructor in charge and to reveal the senior debt attached to the realty.

P2P lending refers to the practice of lending money to individuals or businesses through online services, allowing a direct match between lenders and borrowers. While this new financial service offers relatively high returns compared to banks, they also involve the risk of borrowers defaulting on the loans.

“In order to prevent investor losses, we will ban high-risks products that involve complicated collateral such as virtual currencies or derivatives,” authorities said.

“Also, when a P2P company is facing investigation over alleged fraud or other crimes, the screening process (for business registration) will be put on hold.”

In November last year, the Cabinet approved a P2P regulation bill to respond to the expanded lending practices and to protect consumers. As of March 18, outstanding P2P loans came to 2.3 trillion won and the delinquency rate stood at 15.8 percent.

By Bae Hyun-jung (tellme@heraldcorp.com)