Registered Finance Companies (RFCs) have welcomed new, tight laws introduced by the Central Bank to close loopholes, probe unlicensed businesses and avert – as far as possible – another Sakvithi, Golden Key or Ceylinco-type collapse in the country.
Referring to the Finance Business Billpassed by Parliament on September 21, the heads of several finance companies noted that this will pave the way for the enhancement of the examination and supervisory powers of the Central Bank to control licensed finance companies. This new Act will repeal and replace the Finance Companies Act, No. 78 of 1988, the current law relating to finance business.
Sri Lanka has 37 legal finance companies with a total of 376 branches and assets running to Rs 234 billion, according to the regulator.
The new law effectively curbs unauthorized deposit taking by individuals and institutions. Taking deposits without the consent of the Monetary Regulator is a punishable offence while no company or persons engaged in financial services will be allowed to use the name of “Finance” or “Sri Lanka” without the consent of the Central Bank. Advertising and publications asking for deposits without authority and publication of advertisements soliciting deposits without authority are made offences and provisions are there to obtain a court order to compel a person to provide information and books relating to illegal deposit taking institutions, under the Act.
Shirley Perera, Immediate Past Chairman of the Finance Houses Association, and Deputy Chairman Central Investments and Finance Ltd, told the Business Times that provisions relating to the every licensed finance company using one of the words, 'finance', financing' and 'financial' in its name – while prohibiting others that are unauthorised – is a long felt need and will prevent bogus finance companies from misleading depositors. The use of name, abbreviated name or acronym of a licensed finance company by any other company has been prohibited in order to prevent fraudulent companies from misrepresenting and misleading the public by using names similar to names or acronyms of licensed finance companies, he said. He said the new Act clearly defines the term “deposit” and how and taking deposits without authority is made an offence. The earlier law had made loopholes which led one non regulated finance company to go to courts claiming that it was not a deposit taking institution and therefore didn’t fall under Central Bank’s supervision.
Welcoming the new law, Kithsiri Wanigasekara, Executive Director - Abans Finance Plc and Past Chairman - Finance Houses Association of Sri Lanka said the inclusion of heavy penalties and enhancement of offences in the new Act in comparison to the old one should pave the way to strengthen good governance within RFCs and also prevent operation of unauthorized institutions. All these provisions will no doubt improve compliance by all those involved in this business and will also prevent unauthorized institutions engaged in the acceptance of deposits, he said.
The Finance Business Act now requires all those holding high positions in the RFCs to be fit and proper for the conduct of operations and that will enhance good governance and risk management within institutions. Mr. Wanigasekara noted that the prevention of those who are not fit and proper to hold high positions in a RFC has become mandatory.
By this Act, the Monetary Board of the CBSL is also empowered to publish names of RFCs specifying a supervisory rating and publish names of RFCs in which the Board has serious supervisory concerns. The CBSL can also publish names of institutions that are carrying on Finance Business or Acceptance of Deposits without authority for the information of the public, according to the law.
He said the law empowers the Monetary Board to restrain any Director / Manager or Controller of a Finance Company from carrying out any function in relation to re-organising a Finance Company, arranging for the increase of Capital or reconstituting its Board of Directors or both such measures. He expressed confidence that with the introduction of the new Act the RFC sector will be disciplined and companies will be managed prudently in the interest of the stakeholders.
Rajiv Gunawardane Director , CEO OF Asia Asset Finance Limited said that from a customer’s perspective, the new law will provide greater confidence in the market, by increasing awareness, bringing guidelines to limit misrepresentation in the industry and increasing the level of transparency in the industry. From a company perspective, the new Act limits flexibility of its operations, and enhances supervisory authority of Monetary Board. Further this acts encourages a Risk Averse environment, he added.