In a memorandum circular issued last week, the SEC said existing LIs and prospective registrants will be required to comply with the Financing Company Act of 1998 and register as financing companies.
The SEC earlier issued a circular suspending the registration of new LIs until such time that a more concrete set of rules and regulations are issued to oversee the industry, which has remained unregulated, leading to various offenses such as overexposure and fly-by night operations to the detriment of the investing public.
A week ago, the Department of Justice (DOJ) issued an opinion that affirmed the regulatory jurisdiction of the SEC over the LIs provided that they are not engaged in quasi-banking, an activity which involves the borrowing of funds for relending of purchasing of receivables and other obligations from more than 19 entities.
The same SEC circular also ordered all existing LIs organized as partnerships or single proprietorships (registered at the Department of Trade and Industry) to convert into corporations within one year and secure authority to operate as a financing company within the same period.
Financing companies are corporations primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises by direct lending; discounting or factoring commercial papers or accounts receivables; buying and selling contracts, leases, chattel mortgages; or by financial leasing.
The proliferation of LIs stemmed from the SEC‘s lax control over these entities, which are only required to submit documents such as information sheet and financial statements. On top of that, there is no minimum capitalization required to register, leaving the business a widely unregulated activity, hence posing greater risk to the investing public.
Aside from their exemption from the minimum capital rule, the SEC said LIs tend to borrow from more entities than they are allowed to (maximum of 19), which the SEC said leads to an overexposures that oftentimes result in the companies’ collapse at the expense of its clients.
At present there are 5,061 lending corporations and partnerships registered with the SEC, on top of those registered as single proprietorships with the DTI.
The conversion into financing companies will follow different schedules: for those operating in Metro Manila and other first class cities, a minimum P10 million ion paid-up capital will have to be complied within three years; in other classes of cities, the P5 million minimum capital will take effect within two years; while those based in municipalities have one year to meet the P2.5 million minimum capitalization.