How to Upgrade a Financing Company License to an Online Lending Platform (OLP) License (Philippines)

Upgrading a Financing Company License to an Online Lending Platform (OLP) License in the Philippines

Introduction

In the Philippines, the financial services sector is heavily regulated to ensure consumer protection, financial stability, and compliance with anti-money laundering and data privacy laws. Financing companies, governed primarily by Republic Act No. 8556 (the Lending Company Regulation Act of 2007, amending Republic Act No. 5980 or the Financing Company Act), provide loans and credit facilities to individuals and businesses. With the rise of digital financial services, many financing companies seek to expand their operations online, necessitating an upgrade or additional registration as an Online Lending Platform (OLP).

An OLP is defined under Securities and Exchange Commission (SEC) Memorandum Circular No. 19, Series of 2019 (MC 19-2019), as a platform that utilizes online media or the internet to offer loans to borrowers. This circular establishes the regulatory framework for OLPs, requiring them to register with the SEC to operate legally. Upgrading from a standard financing company license to include OLP capabilities involves complying with specific requirements, submitting documentation, and adhering to ongoing obligations. This process ensures that the entity can leverage technology while maintaining transparency, fairness, and accountability in lending practices.

This article provides a comprehensive overview of the upgrade process, including legal foundations, eligibility criteria, application procedures, required documents, fees, compliance obligations, potential challenges, and post-registration considerations. It is based on Philippine laws, rules, and regulations as administered by the SEC, Bangko Sentral ng Pilipinas (BSP), and other relevant agencies.

Legal Framework

The primary laws and regulations governing the upgrade include:

• Republic Act No. 8556 (Lending Company Regulation Act of 2007): This mandates the registration of lending companies (including financing companies engaged in lending) with the SEC. It sets minimum capitalization, operational standards, and prohibitions on unfair practices.

• SEC Memorandum Circular No. 19, Series of 2019: This specifically addresses OLPs, requiring financing companies or lending companies intending to operate online to register as OLPs. It covers registration, operational guidelines, consumer protection measures, and penalties for non-compliance.

• Republic Act No. 10173 (Data Privacy Act of 2012): OLPs must comply with data protection standards, ensuring borrower information is handled securely.

• Republic Act No. 9160 (Anti-Money Laundering Act of 2001, as amended): Requires OLPs to implement know-your-customer (KYC) procedures and report suspicious transactions.

• SEC Memorandum Circular No. 18, Series of 2019: Provides guidelines on the Truth in Lending Act (Republic Act No. 3765), emphasizing disclosure of loan terms, interest rates, and fees.

• BSP Circulars and Guidelines: While the SEC is the primary regulator for non-bank financial institutions like OLPs, the BSP may oversee aspects related to electronic money or payment systems if the OLP integrates such features.

• Other Relevant Laws: These include the Consumer Act of the Philippines (Republic Act No. 7394), which prohibits deceptive practices, and the Cybercrime Prevention Act of 2012 (Republic Act No. 10175), which addresses online fraud.

The SEC's Corporate Governance and Finance Department (CGFD) handles OLP registrations, ensuring alignment with these frameworks.

Eligibility Criteria

To upgrade a financing company license to an OLP license, the entity must first hold a valid Certificate of Authority (CA) as a financing company or lending company under RA 8556. Key eligibility requirements include:

1. Corporate Structure: The company must be a domestic corporation with at least 60% Filipino ownership, unless qualified under foreign investment laws (e.g., for fintech under the Foreign Investments Act). The board of directors must include at least two independent directors, and key officers (e.g., CEO, compliance officer) must meet fit-and-proper criteria, including no criminal convictions related to financial crimes.

2. Minimum Capitalization: For OLPs, the paid-up capital must be at least PHP 1,000,000 (one million pesos), as per MC 19-2019. If the financing company already meets or exceeds this, no additional infusion is needed; otherwise, capitalization must be increased.

3. Operational Readiness: The company must demonstrate a functional online platform compliant with SEC guidelines, including secure data transmission, user authentication, and integration with credit information systems like the Credit Information Corporation (CIC).

4. Compliance History: No outstanding violations of SEC rules, and the company must not be under investigation for unfair lending practices.

5. Technological Infrastructure: The platform must support features like electronic loan applications, e-signatures (compliant with Republic Act No. 8792 or the Electronic Commerce Act), and real-time disclosures.

Foreign-owned entities may apply if they qualify under the Negative List of the Foreign Investments Act, but full foreign ownership is restricted for lending activities.

Application Process

The upgrade process involves submitting an application to the SEC for OLP registration. It is not a complete "upgrade" per se but rather an additional authority layered on the existing financing company license. The steps are as follows:

1. Pre-Application Preparation:

   • Conduct an internal audit to ensure compliance with all eligibility criteria.
   • Develop or enhance the online platform to meet SEC standards, including testing for cybersecurity (e.g., SSL encryption, firewalls).
   • Appoint a Data Protection Officer (DPO) registered with the National Privacy Commission (NPC) and a Money Laundering Reporting Officer (MLRO).

2. Submission of Application:

   • File the application online via the SEC's Electronic Filing and Submission Tool (eFAST) or in person at the SEC Head Office in Pasay City or satellite offices.
   • The application form is the SEC Form OLP-1, available on the SEC website.

3. Review and Evaluation:

   • The SEC CGFD reviews the application within 30-45 working days.
   • This includes verification of documents, site inspection (virtual or physical) of the platform, and interviews with key officers.
   • If deficiencies are found, the applicant has 15 days to rectify them.

4. Approval and Issuance:

   • Upon approval, the SEC issues a Certificate of Registration as an OLP, which is valid indefinitely unless revoked.
   • The existing financing company CA remains in force, with the OLP registration as an endorsement.

5. Post-Approval Steps:

   • Register with the CIC for credit reporting.
   • Integrate with the BSP's PhilPaSS or other payment systems if offering digital disbursements.
   • Commence operations within 60 days of registration.

Required Documents

A comprehensive set of documents must accompany the application:

• Corporate Documents:

  • Articles of Incorporation and By-Laws (amended if necessary to include online lending).
  • Latest General Information Sheet (GIS).
  • Board resolution authorizing the application.

• Financial Documents:

  • Audited financial statements for the last two years.
  • Proof of paid-up capital (bank certificate).
  • Business plan projecting online lending volumes, risk management strategies, and revenue models.

• Operational Documents:

  • Description of the online platform, including technology stack, user interface screenshots, and data flow diagrams.
  • Loan agreement templates with full disclosures (interest rates capped at 36% per annum effective rate under the Truth in Lending Act).
  • Compliance manual covering AML, data privacy, and consumer protection.

• Personnel Documents:

  • Curriculum vitae and clearances (NBI, police) for directors and officers.
  • Proof of DPO and MLRO appointments.

• Other Requirements:

  • NPC registration certificate for data processing.
  • AML compliance program certified by an independent auditor.
  • Cybersecurity policy and penetration test reports.

All documents must be notarized where applicable, and foreign documents apostilled.

Fees and Costs

• Filing Fee: PHP 5,000 for the OLP registration application.
• Legal Research Fee: 1% of the filing fee.
• Annual Fee: PHP 1,000 per year, plus additional fees based on loan portfolio size (e.g., 1/10 of 1% of average annual loans outstanding).
• Other Costs: Legal fees for document preparation (PHP 50,000-200,000), platform development (PHP 500,000+), and compliance audits (PHP 100,000+).

Fees are subject to adjustment by SEC circulars.

Compliance Obligations

Once registered, OLPs must adhere to ongoing requirements:

1. Consumer Protection: Disclose all fees, interest rates, and penalties upfront. Prohibit harassment in collections (e.g., no threats or public shaming).

2. Interest Rate Caps: Effective interest rates must not exceed ceilings set by the SEC or BSP (currently aligned with usury laws).

3. Reporting: Submit quarterly reports on loan disbursements, defaults, and complaints via the SEC's Online Submission Tool (OST). Annual audited financial statements are required.

4. Data Privacy: Obtain explicit consent for data collection, implement breach notification protocols, and conduct regular privacy impact assessments.

5. AML/CFT: Perform KYC using reliable IDs, monitor transactions, and file suspicious activity reports with the Anti-Money Laundering Council (AMLC).

6. Advertising: All promotions must be truthful and not misleading, approved internally for compliance.

7. Audits and Inspections: Allow SEC inspections and cooperate with audits.

Non-compliance can result in fines (PHP 10,000-1,000,000 per violation), suspension, or revocation of the license.

Potential Challenges and Risks

• Regulatory Scrutiny: The SEC has cracked down on predatory lending, with over 2,000 unregistered OLPs identified in recent years. Delays in approval may occur if the application is incomplete.

• Technological Hurdles: Ensuring platform security against cyber threats is critical; breaches can lead to penalties under the Cybercrime Act.

• Competition and Market Risks: The OLP sector is crowded, with players like Cashalo and Tala. Upgrading requires robust risk assessment to avoid high default rates.

• Legal Risks: Violations of data privacy can lead to NPC fines up to PHP 5,000,000, while AML lapses invite AMLC sanctions.

To mitigate, engage legal counsel specializing in fintech and conduct mock audits.

Post-Registration Considerations

After obtaining the OLP license:

• Expansion Opportunities: Integrate with e-wallets (e.g., GCash, Maya) for seamless disbursements, subject to BSP approval.
• Renewals and Amendments: Notify the SEC of any changes in ownership, address, or operations within 30 days.
• Exit Strategies: If ceasing OLP operations, apply for voluntary revocation, settling all obligations.
• Best Practices: Join industry associations like the Fintech Alliance.ph for updates and networking.
• Monitoring Updates: Stay abreast of amendments, such as potential revisions to MC 19-2019 amid evolving fintech regulations.

Conclusion

Upgrading a financing company license to an OLP license in the Philippines enables traditional lenders to embrace digital innovation while fostering financial inclusion. However, it demands rigorous compliance with SEC regulations to protect borrowers and maintain market integrity. Entities should approach this process with thorough preparation, leveraging professional advice to navigate complexities. Successful OLPs contribute to the Philippine economy by providing accessible credit, but only through ethical and transparent operations. For the latest forms and circulars, refer to the SEC website.