Amendments to Factoring Regulations

On 16 May 2017, the Egyptian Financial Supervisory Authority (“EFSA”) issued an amendment to its factoring regulations.[1] The new amendment elaborates on the criteria that an “independent board member” of a factoring company must fulfil, in an attempt to provide further guarantees against conflict of interest.

Background

Factoring is the financial service which allows specialized companies – licensed by EFSA – to purchase future financial claims from various commercial entities for a discount. This allows the seller to obtain immediate capital based on future income, and allows the buyer (the factoring company) to buy the promised future financial claims at a discounted price. Factoring was originally supervised by the General Authority for Investment and Free Zones until 2009, when EFSA was established and took over the role of supervising all non-banking finance activities, including factoring. The main regulatory framework governing factoring in Egypt is EFSA Decision No. 72 of 2013,[2] which is subject to the most recent amendment.

Main Changes

Decision 72 of 2013 lists a number of conditions that a factoring company must fulfil to be licensed by EFSA. This includes that the company takes the form of a joint-stock company; that it has as one of its founders a financial institution (bank, insurance company, securities firm, etc.) with at least 25% equity stake; that it does not undertake any activity other than factoring except with EFSA’s authorization, and that its board of directors includes at least three independent members. The new amendment (“Amendment”) is exclusively an elaboration on what constitutes an “independent board member”. Such member must not be employed by the factoring company or any of its sister or subsidiary companies, and must have not been employed by such companies during the three years prior to his candidacy for board membership. The Amendment stipulates that an independent board member cannot receive any bonuses or reimbursement from the factoring company or its affiliates, other than that provided to non-executive board members generally. Other protections against conflict of interest are that the independent member and his family may not possess more than 1% of the factoring company’s shares, that he/she is not related to other board members or shareholders with more than 10% equity, and that he/she does not have any business relationship with the factoring company or its affiliates, or shareholders with more than 5% equity. Finally, the Amendment includes a catch-all clause designed to cover a variety of situations, which stipulates that the independent member may not have any interests that would influence or conflict with the interests of the factoring company.

Conclusion

The Amendment seeks to provide clarification to the current regulatory framework governing factoring. It adds further guarantees of independence and protection against potential conflict of interest, which are of significant importance for the factoring business. EFSA has given factoring companies a one-year grace period, ending 16 May 2018, to ensure compliance with the Amendment.   [1] EFSA Board of Directors’ Decision No. 46/2017 amending its Decision No. 72/2013 on Factoring Regulations, Egyptian Gazette, Issue No. 112, 16 May 2017. [2] EFSA Board of Directors’ Decision No. 72/2013 on Factoring Regulations, Egyptian Gazette, Issue No. 9, 12 January 2014.