FRA Factoring Regulations

In August of this year, a new law was issued that grouped together activities of financial leasing and factoring (the “Law”).[1] Following that, the Financial Regulatory Authority (“FRA”) issued several decisions with rules for the regulation of financial leasing activities. The FRA has recently published on its website decision No. 163 of 2018 containing rules for the regulation of factoring activities and the relationship between the involved parties (the “Decision”).[2] In addition, to setting out the general rules for undertaking factoring activities, the Decision elaborates the rules for “consumer factoring”, and the case of providing finance to the seller against non-factored receivables that act as collateral for payment. The new regulations come into force one day following their publication in the Egyptian Gazette, which is yet to take place.

Background

Factoring is a finance service in which a business sells its account receivables to a third party at a discount in order to raise funds. In a typical factoring situation, there are three main parties: the party that sells the receivables (the “seller”), the party that purchases the receivables (the “factor”), and the debtor who is liable to make payment on the receivables (the “debtor”). The Law defines a factoring contract as a financing agreement between the factor and the seller whereby the factor purchases present and future financial rights arising from the sale of goods or the provision of services. It also provides definitions of factor, seller, and debtor that do not diverge from general concepts.

FRA Factoring Decision

• Definitions and General Rules

The new FRA Decision begins with a definition of factoring that is more detailed than the one provided in the Law. It states that factoring is where a factor (factoring company) purchases present and future financial rights arising from the sale of goods or provision of services while providing administrative services that are ancillary to those rights. This is undertaken through the seller’s assignment of their financial rights to the factor. The Decision further states that factored financial rights are transferred to the factor through the factoring contract, with the guarantees and [collection] risks contained therein, without the right to make claims against the seller for said risks. The factor may also provide financing to the seller with the financial rights that are not factored acting as collateral. In this case, the factor has the right to make claims against the seller. The factor could request that the seller obtains insurance against payment default. The type of ancillary services that the factor may offer include providing guarantees against non-payment risks, account management and bookkeeping for factored rights, data on prospective debtors, and collection services. The debtor, who makes payment on the factored receivables, must be a merchant with sufficient commercial data. They could also be a public entity or, according to Article (37) of the Law, an end consumer, in which case, the Decision provides detailed rules under Article (7) thereof, titled “Consumer Factoring.”

• Consumer Factoring

For factoring to involve an end consumer, certain conditions must be met in the factoring company, the seller, and the sold good or service.

1. Factoring Company Conditions

• • Paid capital must be at least EGP 15 million in cash.
  • The company must have issued financial statements and an auditor’s report for at least one fiscal year following its licensing.

2. Seller Conditions

• • The seller must have been in operation of the activity for which the rights are going to be factored for a least one year (for which the seller has issued financial statements and an auditor’s report).
  • That the volume of the seller’s trading in the preceding fiscal year is at least EGP 25 million, with net equity totalling EGP 5 million at least.

3. Conditions in the Sold Good/Service

• • Must be one of the following seven items: transport vehicles, white goods, educational services, medical services, travel and tourism services, and telecommunications. FRA Board could approve other goods and services.
  • Must be free of any existing or future encumbrances to third parties.
  • Must be sold locally.
  • The value of the factored instrument must at least be EGP 1,000 and the maturity date at least 30 days.

• General Seller Obligations

Regardless of whether or not the debtor is an end consumer, the seller has certain obligations vis-à-vis the factor. These include that the seller provides the factor with sufficient information and supporting documents on the transaction, the sold rights, guarantees, and potential risks. Where the seller fails to provide this, and a dispute occurs at collection, the factor has the right to make direct claim for payment against the seller. The seller must also undertake that the sold rights have not been assigned to a third party and must include said rights in the factoring contract.

• Notification of Transfer of Rights

The factor must notify the debtor of the transfer of factored rights by mail, e-mail, or any other notification method, as long as it is approved by the FRA. The notification must include factor, seller, and debtor data, a description of the financial rights in question, the date of the transfer of rights, and a statement informing the debtor to advise the factor of any obstacles to settlement within 14 days from the date of the notification.

• Transfer of Factored Rights between Factors

A factor could sell the financial rights that they have purchased to another FRA licensed factor or a bank that is subject to CBE supervision. A factor may also sell those rights to an international factor or an international bank as long as they are authorized by regulators in their jurisdiction.

Conclusion

Whereas the law only briefly referred to the case of the debtor being an end consumer, the Decision elaborates on the concept of consumer factoring. In addition, it addresses the case of the factor providing finance to the seller with the non-factored financial rights acting as collateral. However, it is unclear how these rules will play out with a new consumer finance law being in the deliberation phase. This is especially true given that the Decision defines the goods and services the financial rights of which could be factored (such as white goods, vehicles, educational and travel services) as well as sets thresholds for when the rights arising from the sale of these goods and services to an end consumer may be factored (if the value of the factored instrument exceeds EGP 1,000 and the payment term exceeds 30 days).   [1] Law No. 176/2018 regulating financial leasing and factoring, Official Gazette, Issue No. 32 (bis) (c), 14 August 2018. [2] FRA Board of Directors Decision No. 163/2018 on the rules for the regulation of factoring activities, available through this link (in Arabic).