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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