The Bill on the Amendment of the Law No. 6361 on Leasing, Factoring and Financing Companies ("Law") and Other Laws ("Bill") has been presented to the Turkish Grand National Assembly ("Parliament").
The savings finance model which is based on financing the housing or motor vehicles purchase of a participant by getting together the funds contributed by all participants seeking a particular order among the participants has become very popular over the years and the Banking Regulatory and Supervisory Authority ("BRSA") turned its eyes over this model. The extraordinary increase in the funds contributed to this model made it necessary to supervise those companies arranging the collection of the funds from the participants for the purposes of protecting the participants.
The Bill intends to set a regulatory framework for companies that offer interest free financing to participants in order for clients to acquire various assets, especially housing and motor vehicles, and the "savings financing" services provided by these companies.
The Bill defines the framework for savings finance companies:
" Incorporation Requirements:
- Companies that provide saving-based interest free financing will have to have the suffix "Savings Finance Company" in their trade names.
- Savings finance companies will have to have at least TRY 100 million as their minimum capital. The regulator aims to protect client interests by requiring a higher minimum capital amount for-savings finance companies, which operate by collecting funds from clients, compared to other companies that are regulated under the Law (i.e. financial leasing, factoring and finance companies).
- Savings finance companies will also have to comply with other incorporation requirements set out under the Law for other types of financial institutions.
- Prohibited Activities:
- Unlike factoring, leasing and financing companies, savings finance companies will not be prohibited from fund raising.
- Savings finance companies will be prohibited from financing any debt unless the debt arises from housing or motor vehicle acquisition. These companies will be prohibited from providing financing except for savings finance arrangements, lending to third parties, and acquiring shares of another company.
- Savings finance companies will be prohibited from using any name that may create the impression that they are banks, or the word "participation" in their trade name. This will distinguish these companies from the participation (interest-free) banks.
- Mergers, Transfers, Divisions, Liquidation:
- Unlike other companies subject to the Law, the Bill foresees a distinct merger, transfer, spin-off and liquidation regime for savings finance companies. These transactions will be subject to the approval of the BRSA.
- Precautionary Measures:
- If the BRSA concludes that a savings finance company is at one or more of the financial risks specified in the Bill during its supervisory activities, it will have the authority to require the company to take the necessary measures the BRSA deems fit.
- To ensure the return of funds collected in case of their liquidation, savings finance companies will be required to reserve a certain amount of funds in a separate account.
- Savings Finance Agreement:
- The Bill defines a savings finance agreement as an agreement providing interest-free financing which grants the client the right to obtain financing for the acquisition of housing or a vehicle. The right to obtain financing is based on predetermined conditions such as the client meeting certain savings amount and periods. The agreement grants savings finance company the obligation to manage the accumulated savings of the client, to repay and to provide financing, and the right to an organization fee.
- The Bill regulates a client's right of withdrawal and termination in detail. The right of withdrawal may be exercised within 14 days following the execution of the agreement, and the termination right may be exercised until the end of the saving period.
- Savings Finance Activities:
- The Bill also provides the general framework of the functioning of savings finance companies. Accordingly, companies will have to manage their liquidity by arranging separate saving plans for each client or client group.
- Savings finance companies will have to segregate their saving fund accounts from their other accounts.
- Savings finance companies will operate in line with interest-free financing principles.
- Financial Institutions Association:
- The Leasing, Factoring and Financing Companies Association's name will be changed to the Financial Institutions Association ("FIA").
- Leasing, factoring, financing, savings finance and asset management companies will be obliged to become members of the FIA, as well as other institutions that are subject to the BRSA's supervision and deemed fit to become members of the FIA.
- Violation of the savings finance agreement or the rules that apply to the savings finance activities will be subject to administrative fines. Moreover, persons that prevent clients from being refunded their savings after exercising their right of withdrawal or termination right will be punished with imprisonment from six months two years, and a judicial monetary fine up to five hundred days.
- Persons who engage in savings finance activities without being authorized to do so will be punished with imprisonment from two to five years, and a judicial monetary fine up to five thousand days. Moreover, the BRSA will be able to require the liquidation of companies that operate without permission.
- Revocation of Operating License and Liquidation:
- The Bill foresees a special liquidation regime for savings finance companies. Accordingly, the BRSA may revoke the operating license or decide to liquidate a company upon detecting certain financial risks if the company does not take the measures requested by the BRSA, or if these measures are not deemed sufficient.
- Transition Period:
- The Bill requires savings finance companies already operating to (a) apply to the BRSA within one month following the amendments' entry into force; (b) to include a plan with their application that either foresees how they will comply with the amendments within six months, or how they will be liquidated without harming client interests; and (c) to take the necessary actions if the plan is deemed appropriate. The six-month period may be prolonged if certain conditions are met.
- Provisions regarding engaging in unauthorized savings finance activities will be applied to companies that continue their activities without applying to the BRSA within the above-mentioned one month period.
The Bill intends to regulate the savings finance system and bring it under regulatory supervision. Consequently, companies that have been providing financial services without being subject to any supervision will be under regulatory scrutiny. The regulator aims to protect the rights and interest of clients and to ensure reliability in financial markets.
It will be vital for companies that are currently engaged in savings finance activities to follow the determined procedure after the Bill's entry into force in order not to be subject to any administrative or criminal sanctions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.