Further FRA Decisions on Factoring

In its Board of Directors meeting dated 31 December 2018, the Financial Regulatory Authority (“FRA”) passed three decisions in relation to factoring and financial leasing activities that have since been published on the FRA’s website but not yet in the Egyptian Gazette. These are (1) Decision No. 195 of 2018 on the rules and procedures for suspension of activity, liquidation, merger, or acquisition of companies licensed to practice financial leasing or factoring (“Decision 195/2018”);[1] (2) Decision No. 192 of 2018 on financial adequacy standards for companies licensed to undertake factoring (“Decision 192/2018”);[2] and (3) Decision No. 197 of 2018 amending a previous FRA decision (No. 163 of 2018) on procedural regulations for factoring (“Decision 197/2018”).[3]  

Regulation Timeline

On 14 August 2018, a new law was passed regulating two main non-banking financial activities: financial leasing and factoring law No. 176 of 2018 (the “Law”).[4] There is no reason why the two activities were grouped under one law except perhaps formal convenience. Since the issuance of the Law in August, the FRA issued several decisions regulating the two activities which we have covered in detail in previous Egypt Legal Update issues:

• On 27 September 2018, the FRA Board of Directors issued decision No. 137 of 2018 on the rules for licensing financial leasing and factoring companies.[5] This includes the requirements for obtaining the initial approval for establishing the related companies. The decision specified that financial leasing and factoring should be undertaken through an Egyptian joint stock company that works in either of the two activities, but which could also combine working in multiple financial activities such as financial leasing, factoring, and real estate financing upon obtaining the necessary permits. Companies wishing to engage in financial leasing and/or factoring were given six months (until 15 February 2019) to either establish a new company for these activities or undertake the necessary amendments in accordance with the new regulations if they were already in operation. More details on the decision could be found in the Egypt Legal Update issue of Week 1 of October 2018.

• On 22 November 2018, FRA Board of Directors Decision No. 163 of 2018 was published with rules for the regulation of factoring activities and the relationship between the involved parties.[6] In addition to setting out the general rules for undertaking factoring activities, the decision elaborated the rules for “consumer factoring” and the case of providing finance to the seller against non-factored receivables that act as collateral for payment. Further details on the decision could be found in the Egypt Legal Update issue of Week 3 of November 2018.

• On 27 November 2018, FRA Board of Directors Decision No. 164 of 2018 was published with governance rules for licensed financial leasing and factoring companies.[7] The rules were made mandatory as a condition for the continuation of licensing, and companies were given six months (until 26 May 2019) to comply. The governance rules contained in the decision refer to internal governance policies and systems, the board of directors and its sub-committees, the auditors, conflict of interest, and disclosure and transparency rules. For more details, kindly refer to the Egypt Legal Update issue of Week 2 of November 2018.

The Three Decisions Passed on 31 December 2018

1. Decision 195/2018 – Regulating the suspension of activity, liquidation, merger, or acquisition of financial leasing and factoring companies. Decision 195/2018 applies to both factoring and financial leasing.

• Suspension of Activity

The FRA must be informed of any suspension of activity through a form that is submitted containing the reasons for suspension and the extraordinary general assembly decision to suspend. Suspension must not be less than six months and may not exceed one year (which may be renewed up to a maximum of three years). The company must have settled any dues it owes the FRA or third parties and it must submit an attestation from its legal advisor with the company’s legal status with respect to lawsuits and claims.

• Liquidation

Voluntary liquidation must also be presented to the FRA along with the reasons and justifications, an extraordinary general assembly decision, and a report from the auditor. The company must also submit its suggested liquidation plan, and the manner in which it is to transfer contractual rights and obligations to another licensed entity without detriment to its clients.

• Merger

A company must submit a request with the reasons and terms of the merger, approving decisions undertaken by the boards and extraordinary general assemblies of both merging companies, auditors’ reports from both companies, the manner in which the rights of the shareholders of the company requesting the merger will be determined, and a plan for the transfer of financing agreements to the resulting company. The company that is merging with the applicant company must have a license to undertake financial leasing and/or factoring activities.

• Acquisition

Decision 195/2018 refers to the rules of the transfer of shares applicable to non-banking financial companies according to FRA Decision No. 53 of 2018 which reorganized the framework governing share ownership and transfer in these types of companies, as well as their licensing and continued operation. Under Decision No. 53 of 2018, the shares of non-banking financial companies (including financial leasing and factoring companies) may not be transferred/traded from the date of the establishing of the company and until licensing, except with the prior approval of the FRA. Furthermore, shareholding of 5% or more of the capital or voting rights of the company must be notified to the FRA, without having to obtain FRA’s prior consent. Shareholding exceeding 10% of capital, as well as any 5% increases or its multiples, must be presented to the FRA for prior consent. Share ownership exceeding 25% of capital or voting rights triggers the submission of documents additional to those submitted with a request of transfer of shares in general. In addition, FRA’s prior consent must be obtained in the event of an acquisition which represents 10% or more of the market share in a certain field. This is all without prejudice to the rules concerning the acquisition of shares in listed companies, or in public offerings according to Chapter 12 of the Executive Regulations of the Capital Market Law.

2. Decision 192/2018 – On capital adequacy ratios in factoring companies

Decision 192/2018 lays out standards for capital adequacy in factoring companies with the aim of ensuring the availability of sufficient financial coverage for the sound management of credit risk, operational risk, market, and liquidity risks. Factoring companies are required to maintain a minimum capital adequacy ratio of 10% that is gradually increased to 12% within three years from the date of this decision’s coming into effect.[8] Decision 192/2018 contains a formula for the calculation of the capital adequacy ratio, and the company must report on steps taken in this regard twice annually. Decision 192/2018 further contains the rules for the weighting of risks against assets, margins that must be maintained to cover operational risk, the assessment of concentration risks, debt leverage, asset-to-debt ratio, liquidity ratio, provisional accounts, written-off debt, and standards for the assessment of client creditworthiness. All of the aforementioned information must be periodically reported to the FRA in a capital adequacy ratio report that is prepared following an FRA model. Factoring companies are required to prepare workplans with timelines for meeting the requirements provided under this decision and they must submit the same to the FRA by 30 June 2019. The company must also report updates in that respect to the FRA on a quarterly basis.

3. Decision 197/2018 – Consumer factoring

Decision 197/2018 adds membership fees of sports clubs to the list of sold goods or services which could be subject to factoring when the debtor is an end consumer (consumer factoring). Previous FRA Board Decision No. 163 of 2018 had provided rules for consumer factoring under its Article (7), in which it elaborated on the conditions regarding the factoring company, the seller, and the sold good or service for factoring to involve an end consumer. In particular, it specified the goods that could be sold or the services that could be provided when debtors are end consumers as follows: transport vehicles, white goods, educational services, medical services, travel and tourism services, telecommunications, and other goods or services approved by the FRA Board. Decision 197/2018 adds to this list membership fees of sports clubs.   [1] FRA Board of Directors Decision No. 195/2018 on the rules and procedures for suspension of activity, liquidation, merger, or acquisition of companies licensed to practice financial leasing and factoring, available through this link (in Arabic). [2] FRA Board of Directors Decision No. 192/2018 on the financial adequacy standards for companies licensed to undertake factoring, available through this link (in Arabic). [3] FRA Board of Directors Decision No. 197/2018 amending FRA Board of Directors Decision No. 163/2018 on the rules for the regulation of factoring activities, available through this link (in Arabic). [4] Law No. 176/2018 regulating financial leasing and factoring activities, Official Gazette, Issue No. No. 32 (bis) (c), 14 August 2018. [5] FRA Board of Directors Decision No. 137/2018 on the rules for licensing financial leasing and factoring companies, Egyptian Gazette, Issue No. 213 (cont.), 27 September 2018. [6] FRA Board of Directors Decision No. 163/2018 on the rules for the regulation of factoring activities, Egyptian Gazette, Issue No. 263, 22 November 2018. [7] FRA Board of Directors Decision No. 164/2018 on governance rules for licensed financial leasing and factoring companies, Egyptian Gazette, Issue No. 267, 27 November 2018. [8] FRA Board of Directors Decision 192/2018 comes into effect one day following its publication in the Egyptian Gazette, which has not taken place until the date of writing this Egypt Legal Update issue.