In the Philippines, the Securities and Exchange Commission (SEC) maintains a rigorous regulatory framework for entities engaged in lending and financing. This oversight is primarily governed by two landmark pieces of legislation: the Lending Company Regulation Act of 2007 (Republic Act No. 9474) and the Financing Company Act of 1998 (Republic Act No. 8556). Understanding the distinction between these two and their respective requirements is crucial for any entity seeking to operate legitimately.
I. Fundamental Distinctions: Lending vs. Financing Companies
While both types of entities provide credit, their legal definitions and operational scopes differ:
- Lending Companies: These are corporations engaged in the business of granting loans from their own capital funds or from funds sourced from not more than nineteen (19) persons. They are governed by R.A. 9474.
- Financing Companies: These are corporations primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises. Their activities include leasing, factoring, and buying/selling contracts or other evidence of indebtedness. They are governed by R.A. 8556.
II. The Certificate of Authority (CA)
The most critical requirement for any lending or financing entity is the Certificate of Authority to Operate (CA).
Important Note: A simple Certificate of Incorporation from the SEC does not authorize a company to engage in lending or financing. Operating without a valid CA is a criminal offense, often referred to in the Philippines as "illegal lending."
Mandatory Incorporation
All lending and financing entities must be organized as a corporation. Sole proprietorships or partnerships are not permitted to engage in these activities. The corporate name must also include the terms "Lending Company," "Lending Corporation," "Financing Company," or "Financing Corporation," as applicable.
III. Minimum Capitalization Requirements
To ensure financial stability and protect the public, the SEC mandates specific minimum paid-up capital requirements:
| Entity Type | Minimum Paid-up Capital |
|---|---|
| Lending Companies | At least PhP 1,000,000.00 (unless a higher amount is required by the SEC for specific locations). |
| Financing Companies | Ranges from PhP 10,000,000.00 (for those located in cities) to PhP 2,500,000.00 (for those in municipalities), depending on the specific classification and location. |
Note: These amounts are subject to adjustment by the SEC through Memorandum Circulars.
IV. Governance and Compliance Standards
Legitimate companies must adhere to strict governance protocols to maintain their licenses:
Fitness and Propriety Rule: Directors and officers must meet "fit and proper" standards, ensuring they have no records of conviction for crimes involving moral turpitude or violations of the Corporation Code.
Foreign Ownership Limits: * Lending Companies: Can be 100% foreign-owned, provided they meet specific capital requirements (usually higher for foreign-owned entities).
Financing Companies: Can also be 100% foreign-owned, subject to reciprocity laws and specific SEC conditions.
Anti-Money Laundering (AMLA): Both types of companies are "covered persons" under the Anti-Money Laundering Act. They must register with the Anti-Money Laundering Council (AMLC) and implement robust Know Your Customer (KYC) and suspicious transaction reporting systems.
V. Operational Transparency and Fair Practices
The SEC, in conjunction with the Bangko Sentral ng Pilipinas (BSP), regulates how these companies interact with the public:
1. Truth in Lending Act (R.A. 3765)
Before any transaction, a company must provide a Disclosure Statement to the borrower. This document must clearly state:
- The cash price or amount to be loaned.
- Down payment or credits (if any).
- All charges not incident to the extension of credit (itemized).
- The total amount to be financed.
- The finance charge expressed in pesos and cents.
- The effective annual interest rate.
2. Fair Debt Collection Practices (SEC MC No. 18, s. 2019)
The SEC strictly prohibits "unfair collection practices." This includes:
- The use or threat of violence or other criminal means.
- Use of profanity or insults.
- Public disclosure of the borrower’s personal information (debt shaming).
- Contacting the borrower at unreasonable hours (generally before 6:00 AM or after 10:00 PM).
- Misrepresentation or false pretenses to collect a debt.
3. Ceiling on Interest Rates and Other Charges (BSP Circular No. 1133)
For small-value, short-term loans (often associated with online lending), the BSP has imposed ceilings:
- Nominal Interest Rate: Maximum of 6% per month (approx. 0.2% per day).
- Effective Interest Rate (EIR): Maximum of 15% per month (including all fees).
- Penalties for Late Payment: Capped at 5% per month on the outstanding amount.
VI. Reporting and Post-Registration Requirements
Maintaining a license requires continuous reporting to the SEC:
- Annual Financial Statements (AFS): Audited by an SEC-accredited external auditor.
- General Information Sheet (GIS): Filed annually to update the SEC on corporate structure.
- Special Reports: Such as the Semi-Annual Report on Business and Operations.
- NPMap: Lending and financing companies must register with the SEC’s online portal for reporting.
VII. Consequences of Non-Compliance
The SEC has the authority to revoke the Certificate of Authority and the Primary Registration of any company found violating these regulations. Penalties include:
- Administrative Fines: Ranging from thousands to millions of pesos.
- Cease and Desist Orders (CDO): Immediate suspension of operations.
- Criminal Prosecution: Imprisonment and heavy fines for operating without a CA or engaging in fraudulent activities.