Amid Woongjin's acquisition of Korea's top funeral service company, Freedy Life, issues regarding the management and supervision of prepaid payments from funeral service companies, approaching 10 trillion won, have emerged.
Funeral service companies collect prepaid fees from subscribing customers to prepare future funeral services. As a consumer protection measure, 50% of these prepaid fees must be deposited in banks or joint indemnity associations under the Installment Transactions Act.
The issue lies with the remaining 50%. In particular, concerns have been raised about the lack of proper management of funds excluding those necessary for conducting customer funeral procedures.
◇Rapidly growing funeral service market…Prepaid fees nearing 10 trillion won
The domestic funeral service market has seen rapid growth since 2020, as the aging population increases the number of customers preparing for future funerals.
According to the Fair Trade Commission, as of the end of March last year, there were 8.92 million subscribers to funeral service companies, with the scale of prepaid fees reaching 9.4486 trillion won. Compared to 2020, the number of subscribers increased by 40%, and prepaid fees by 60%. This year, prepaid fees are expected to exceed 10 trillion won.
The domestic funeral service market is led by Freedy Life, along with Boram Funeral Service, Kyowon Life, and Daemyung Station. In particular, Woongjin's move to acquire the top player, Freedy Life, is expected to bring significant changes.
On the 17th, Woongjin was selected as the exclusive negotiator for the complete acquisition of Freedy Life shares held by private equity fund manager VIG Partners.
Woongjin is expected to sign the main acquisition contract in May if there are no issues after conducting due diligence on Freedy Life. Previously, Daekyo, known for its 'Eye Level' learning materials, and rental giant Coway also entered the funeral service market last January.
These corporations are introducing products that incorporate various services such as medical care, travel, and even the weddings of customers' children along with their existing funeral offerings.
Jeong Hyun-kyung, executive director of financial advisory at Samjung KPMG, a global accounting and consulting firm, noted, "The funeral service industry in Korea, which was mainly focused on funeral services, is evolving to provide care throughout the entire lifecycle in response to the aging society."
◇Prepaid fee management must be transparent…Fair Trade Commission takes action on funeral service company major shareholder transactions
Although the domestic funeral service market has grown, the management and supervision of prepaid fees are not being conducted properly.
Funeral service companies are required to deposit 50% of the payments received from members into banks or funeral service mutual aid associations every month, according to the Installment Transactions Act. This is to ensure that if a funeral service company goes out of business, 50% of the payments can be refunded to subscribers.
The issue is with the remaining 50% of the prepaid fees that are not deposited. Funeral service companies use this money to provide funeral services to members and even invest in real estate or financial products. They are essentially engaging in financial activities using the prepaid fees collected from customers.
Funeral service companies emphasize that by managing part of the prepaid fees, they can generate profits and provide better funeral services to customers. They also claim to have an internal investment review organization to thoroughly manage the prepaid fees.
However, experts point out that there is no legal management or supervision system in place for this fund management, making it impossible to determine how corporations utilize prepaid fees.
Currently, funeral service companies are not financial institutions and therefore do not receive supervision for financial investments. They are under the Fair Trade Commission's management as prepaid installment service providers, but apart from the requirement to deposit 50% of the prepaid fees, there are no regulations on fund management.
Concerns have also been raised that prepaid fees could become 'fund sources' for company owners. In fact, the prepaid fees from Daemyung Station were used as a financial source for its affiliated companies within the Daemyung Sonogroup.
From 2017 to 2022, the prepaid fees from Daemyung Station were utilized for long-term and short-term lending to affiliated companies such as Daemyung Tour Mall, Jeju Animal Theme Park, Seo & Partners, and Sono International. Some have been recovered, but others have been written off as bad debts or become non-performing assets.
Go Hyoung-seok, a professor at Korea Maritime and Ocean University who previously served as the president of the Consumer Law Society, stated, "The 50% deposit ratio established by the Installment Transactions Act in 2010, during the early stages of the funeral service market, should be gradually increased to 85% to fit the current situation," adding, "It’s time to consider management and supervision measures for funeral service companies' handling of prepaid fees."
Under these circumstances, the government is reviewing the introduction of regulations related to the fund management of funeral service companies. The Fair Trade Commission is currently pushing for amendments to the Installment Transactions Act to establish regulations concerning transactions involving owners and major shareholders of funeral service companies.
A Fair Trade Commission official stated, "Because there are no regulations on investing or lending the remaining 50% of the prepaid fees after depositing 50% in banks, there are limits to preventing moral hazard among funeral service companies," adding that they are pursuing amendments to the Installment Transactions Act to prevent issues such as lending prepaid fees to affiliates or related parties at low interest rates.