Hello. I am Attorney Lee Young-kyung from Cheongchul Law Firm.

The Fair Trade Commission (hereinafter referred to as 'FTC') recently decided to impose corrective measures and file a complaint with the prosecution regarding the installment transactions of Risis Co., Ltd. (hereinafter referred to as 'Risis'), which sold combined prepaid travel products and electronics through a prepaid installment system, violating the Installment Transaction Act (hereinafter referred to as 'Installment Act') and the Act on Fair Labeling and Advertising (hereinafter referred to as 'Labeling and Advertising Act'). This action marks the first penalty since the revision of the Enforcement Decree of the Installment Act in February 2022, which included the sale of travel products as part of prepaid installment contracts, highlighting significant implications for the industry. This article aims to thoroughly examine the facts of the case, the FTC's judgment, and key takeaways.

This posting is based on the FTC's press release dated September 5, 2024, and please be aware that the final disposition may change due to administrative litigation by the parties involved.

[Question]

Is it necessary to register as a prepaid installment business to sell travel products in a prepaid installment form? If one conducts business without this registration, will they face sanctions under the Installment Act?

[Answer]

Yes, if selling travel products in a prepaid installment format, registration as a prepaid installment business with the local government is required.

1. Facts

1) Violations of the Installment Act

Risis Co., Ltd. entered into 383 installment contracts for combined travel and electronics products from June to December 2021 and maintained 275 contracts as of September 2023. This product was structured to collect membership fees of about 60,000 to 90,000 KRW per month from members at least twice and provide future usable travel products (such as special lodging rights at resorts).

Specifically, two combined products called 'Risis 598' and 'Risis 897' were sold. Customers paid monthly fees of 59,800 KRW and 89,700 KRW, respectively, over 120 months, received electronics such as laptops upon signing, enjoyed benefits like free lodging, resort discounts, and travel discounts during the payment period, and could receive back the total paid amount upon full payment until maturity.

On February 3, 2022, Article 1-2 of the Enforcement Decree of the Installment Act was newly established. This action was taken to strengthen consumer protection and enhance the soundness of the prepaid installment market. Accordingly, businesses selling travel products in the form of prepaid installment contracts also fell under the category of prepaid installment businesses as stipulated in Article 2, Item 4 of the Installment Act.

Due to this legal amendment, Risis was required to register as a prepaid installment business with the relevant local government (the Seoul Metropolitan Government) by February 2, 2023. Registration requirements included a capital of over 1.5 billion KRW. However, it was confirmed that Risis continued to operate without registration and failed to comply with this.

2) Violations of the Labeling and Advertising Act

Additionally, from mid-July 2021 to early September of the same year, Risis sold the combined products while conducting advertisements through the mobile app 'KakaoTalk' and a third-party blog as follows:

-       "Samsung and LG laptops provided"

-       "Get the latest home appliances for free!"

-       "Get 10 free lodging vouchers right away with the latest appliances!"

However, Risis did not provide electronics such as laptops for free and made consumers bear the costs through separate installment contracts.

2. FTC's Judgment

The FTC judged Risis's actions as follows:

1) Violations of the Installment Act

Risis's unregistered business activities as a prepaid installment business violate Article 18, Paragraph 1 of the Installment Act. In response, the FTC decided to impose corrective measures and file a complaint with the prosecution. The main contents of the corrective measures are as follows:

-       Prohibition of similar actions in the future

-       Suspension of recruiting new members until the registration as a prepaid installment business is completed

2) Violations of the Labeling and Advertising Act

Risis's advertising activities correspond to false and exaggerated advertisements under Article 3, Paragraph 1, Item 1 of the Labeling and Advertising Act. The FTC recognized these advertisements as misleading or excessively inflated, potentially misleading ordinary consumers into believing they could obtain home appliances without any payment, obstructing rational purchasing decisions and undermining fair trading order. Key contents of the corrective measures are as follows:

-       Immediate cessation of the relevant advertisements

-       Prohibition of similar advertising practices in the future

-       Public announcement of the fact of the corrective measures received

3. Implications

This case is significant as it is the first penalty imposed on the sale of travel products included in prepaid installment contracts following the revision of the Enforcement Decree of the Installment Act. It particularly provides the following implications:

1) To prevent similar cases from occurring in the future, businesses selling prepaid travel products must verify their registration as a prepaid installment business under the Installment Act. They should particularly scrutinize whether they meet registration requirements such as a capital of over 1.5 billion KRW.

2) This action is meaningful as it penalizes advertising practices by prepaid installment businesses that mislead consumers into thinking they offer high-value gifts for free. Companies must clearly state actual transaction conditions in their advertisements and refrain from expressions that may mislead consumers.

3) The FTC will continue to monitor violations of the law in the prepaid installment market and advertising practices that obstruct consumers' correct purchasing choices and undermine fair trading order, imposing strict sanctions upon discovery of illegal activities.

In conclusion, this case illustrates the strengthening of legal regulations over the entire prepaid installment business. Especially since it marks the first penalty case since travel products have been included in prepaid installment contracts, related industries must take this as a lesson and be more cautious about compliance with regulations. Furthermore, since penalties for advertising practices that mislead consumers are also being strengthened, businesses should consider this thoroughly when formulating marketing strategies.

In the future, businesses must strictly comply with the Installment Act and the Labeling and Advertising Act, designing their business models in a manner that protects consumer rights. This goes beyond merely avoiding legal risks; in the long run, it will enhance the trustworthiness and competitiveness of the business.

Cheongchul Law Firm has extensive experience and expertise in cases related to the Fair Trade Commission's regulations, including the Labeling and Advertising Act and the Installment Act. If you are concerned about related issues, please feel free to contact us. We will do our best to protect your rights and achieve the best results in Seoul and across the country.

Cheongchul Law Firm will be your reliable legal partner. If you need a consultation with an attorney specialized in Franchise Business Act, please contact us right away.