South Korea Proposes Major Overhaul of Debt Collection Industry With New Licensing Requirements

South Korea’s Financial Services Commission (FSC) has unveiled sweeping reforms that would fundamentally reshape the country’s purchased receivables collection industry, replacing the current registration system with a much stricter licensing framework that regulators believe could reduce the number of debt collection firms from more than 900 to roughly 30.

The proposal, announced during the FSC’s fifth Inclusive Financial Transformation Meeting on May 28, is part of a broader effort by the newly elected administration of President Lee Jae Myung to strengthen consumer protections and address concerns about aggressive collection practices by smaller debt buyers.

New Licensing Standards Would Raise Entry Barriers

Under the current system, companies can register to purchase and collect charged-off debt if they meet relatively modest requirements, including minimum capital of 500 million won and certain shareholder qualifications. Regulators say the framework has allowed hundreds of small firms to enter the market with limited operational capacity.

The FSC’s proposal would replace registration with a licensing system requiring significantly higher standards. Companies seeking licenses would need at least 3 billion won in paid-in capital, a viable business plan, qualified major shareholders, and demonstrated operational expertise. Financial institutions would also be required to hold at least a 50% ownership stake in newly licensed entities.

The regulator also plans to strengthen staffing and operational requirements. Licensed firms would need at least 20 full-time employees, including qualified professionals, along with information security systems designed to protect sensitive consumer data. Separate reporting indicates companies would need to employ debt collection professionals, including attorneys, and maintain appropriate information processing and communications infrastructure.

According to the FSC, 911 registered purchased receivables collection companies currently manage approximately 22.4 trillion won in overdue loans, representing 67.8 trillion won in face value. On average, these firms employ only six workers. By comparison, collection firms already operating under a licensing framework are substantially larger and better resourced.

Industry Consolidation Expected

Financial authorities expect the reforms to trigger significant consolidation across the industry.

Existing purchased receivables collectors would receive a three-year transition period to obtain licenses. During that time, firms would be permitted to renew their registrations once if necessary. Companies that fail to secure licenses by the end of the transition period would be required to sell their distressed debt portfolios to licensed collectors or financial institutions within six months.

Regulators have indicated that existing firms will be exempt from the new requirement that financial institutions own at least 50% of the business, avoiding forced ownership restructuring. However, they will still need to meet capital, personnel and operational standards.

Officials expect mergers and acquisitions among larger market participants as smaller operators seek compliance pathways or exit the industry altogether.

Debtor Protection at the Center of Reforms

The FSC said the changes are designed to address structural weaknesses in the current framework and strengthen debtor protections.

As part of the overhaul, licensed debt buyers would be prohibited from simultaneously engaging in lending or loan brokerage activities. Permitted ancillary activities would be limited to functions closely related to distressed debt management, such as nonperforming loan securitization, collateral acquisition, debt-related investigations, and debt-for-equity swap transactions.

The commission also plans to strengthen compliance expectations by requiring adherence not only to South Korea’s Debt Collection Act and Individual Debtor Protection Act but also to debt collection guidelines that govern day-to-day operations.

The reforms align with President Lee’s stated objective of eliminating what authorities characterize as prolonged or excessive collection activity by undercapitalized firms.

Broader Financial Inclusion Initiative

The debt collection reforms were announced alongside the creation of an Inclusive Finance Strategy Task Force, which will examine broader issues related to financial exclusion and credit access. The task force will evaluate topics including credit reporting standards, use of nonfinancial data in underwriting, financial institution governance, and the role of prudential regulation in expanding or restricting access to financial services.

The FSC plans to gather industry feedback over the coming months and prepare amendments to the relevant lending laws by mid-August, with the goal of securing parliamentary approval later this year.