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Sunday, 17 February 2013

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Deposit taking per se, does not constitute finance business

When a person obtains a new mobile telephone connection, he pays a deposit. When a person enters a private hospital for in-door treatment, he pays a deposit. When a person buys soft drinks or beer, he places a deposit for the empties. When a person places an order for the delivery of his newspapers, he makes a deposit to the newspaper company. When a person retains the services of a lawyer, he pays a deposit towards the fees.

The question then emerges as to whether these institutions or persons who receive deposits are carrying on "finance company" businesses. Obviously, not. If so, it is clear that the nature of the transactions carried out by the institution or person receiving the deposit has to be the key determinant factor when ascertaining whether or not such institution or person is carrying on a finance company business.

The determination of a business as to whether it constitutes finance business is set out presently in the Finance Business Act and previously in the Finance Companies Act. Under both laws,based on the conditions as specified in the relevant Acts, it is the responsibility of the Monetary Board of the Central Bank of Sri Lanka (MB) to determine as to whether a particular business is a finance business or not. In order to do so, it is clear that the MB will have to undertake an assessment of the nature of the business, the business processes and practices, the documentation, etc. of the organization or person, and thereafter make the determination. Although a member of the public could claim that a particular business is a finance business or otherwise, it would be up to the MB to undertake a diligent, quasi-judicial review and make a determination.

The above background information is of relevance today, in order to understand the debate that has recently surfaced in relation to the Golden Key Credit Card Company Ltd (GKC). An Opposition MP has been quoted as claiming that those who deposited money in the GKC have lost funds because the Central Bank did not determine that GKC was operating a finance business.

In this regard, a critical examination of the documentation that was used in the GKC transactions of issuing credit cards will be useful. In that regard, the GKC documentation available with security deposit holders reveal that deposits made at the GKC were made on the basis that those deposits were being made in order to obtain a credit card from the GKC and that the deposit was to establish the 'limit' of their credit. As a pioneer in issuing credit cards in Sri Lanka,the GKC had attracted many customers who wished to obtain credit cards, and such customers were expected to place a deposit with GKC so that they could utilize credit up to the limit of their security deposit. Accordingly, the legal position of GKC was that it had obtained security deposits in order to issue credit cards to the persons who were making the deposits. On that basis, their business would not have fallen within the definition of a 'finance company', and it logically followed therefore that they were not subject to the regulatory supervision of the Central Bank.

The careful study of the Central Bank's recent public statement suggests that it is likely that Counsel for GKC, Wijedasa Rajapakshe, PC who is currently the President of the Bar Association, would have made submissions to this effect to the Central Bank in order to convince the Central Bank that it had no legal right to supervise the activities of the GKC. Such a submission would have made legal sense, and it is likely that the determination of the MB in this regard would have been,quite rightly, that the business of GKC did not constitute finance business, as per the Finance Companies Act, and therefore the MB could not legally prevent the credit card business of GKC.

However, in fairness to the Central Bank, it has been regularly publishing advertisements through which the public had been alerted of the institutions that were regulated by the Central Bank and were therefore empowered to obtain deposits from the public. A large number of such advertisements have been published since 2003, and it is untenable for anyone to claim that they did not know that the GKC was not a Central Bank regulated institution. In fact, the documentation used by the GKC was substantially different to the documentation used by finance companies when accepting deposits, and it is quite likely that those who transacted business with GKC, would have placed their deposits with the full knowledge and understanding that GKC was not a finance company. Having placed security deposits with the GKC with the full knowledge that the GKC was not a regulated bank or a finance company, and after enjoying much higher returns than the millions of their fellow countrymen who diligently deposited their savings in regulated finance institutions at much less interest,those security deposit holders of the GKC cannot now claim that they should be given preferential treatment by the Government. In fact, if they do so, they would actually be seeking indirect relief from the tax payers, even after enjoying super returns by assuming a high risk driven by their greed.

Nevertheless, if the Government wishes to assist these depositors in some reasonable manner so that they could recover as much as possible out of their security deposits, that would be a laudable humanitarian gesture. At the same time, however, such an exercise has to be carried out with caution, so as to not establish a moral hazard whereby excessive risks are encouraged which may lead to reckless investors or institutions,using a possible GKC precedent to heap losses upon the government in the future.

As to how the relevant authorities and stakeholders act in these circumstances to work out an equitable solution would therefore be watched with great interest, and a pragmatic approach with an innovative outlook would be called for, in reaching such a solution.

In the recent past, the Central Bank has shown great acumen in working out restructuring schemes in difficult situations, which have served to safeguard the financial system in the country and to infuse confidence. Hence, it is hoped that reliance would be placed on their skills, expertise and innovativeness, towards working out a solution in this difficult situation as well.

 

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