FRA Issues Internal Policy System R

On 20 January 2019, the Financial Regulatory Authority (“FRA”) issued further rules for factoring and financial leasing activities (the “Decision”).[1] The decision follows several others that the FRA has issued in relation to the two activities since the passing of the financial leasing and factoring law in August 2018.[2] Previously issued decisions pertained to licensing – including the conditions and continuation of licensing – the preparation and disclosure of financial statements, financial adequacy rules, and governance of companies undertaking financial leasing and/or factoring. You can refer to the Egypt Legal Update Issue of January, Week 4 for a compilation of FRA decisions that have been issued for the regulation of the two activities thus far. As for the Decision issued last month and recently published on the FRA’s website, it contains requirements for “good workflow”, the protection of consumer and creditor rights, internal monitoring systems, credit policies, risk management, information and telecommunication systems and their securing, branch registration management and closure rules, reporting and timelines. This Decision is applicable one day from its publication in the Egyptian Gazette, which has not yet occurred. It is unclear why the FRA has not chosen to group many of these decisions in one comprehensive set of rules for each of the two activities. The Latest FRA Decision No. 7 of 2019

1. Protection of Customer and Creditor Rights

This includes maintaining records and documentation such as board and general assembly meeting minutes, activity related decisions and correspondence in an easily accessible manner, disclosure to clients on interest rates and commissions, maintaining data privacy, and creating and maintaining systems for receiving complaints. The company must also disclose any risks that could threaten the rights of creditors or potentially obstruct payment. FRA’s Consumer Protection Guide for the Non-Banking Financial Sector must be followed, and all company paper must show that it is subject to FRA supervision. With respect to complaints, the Decision specifically provides that companies must inform customers of the availability of submitting complaints through post or e-mail and on the company’s website. In addition, a company must designate a phone number for complaints, and have complaint boxes placed in branches. The company has two weeks – as per the FRA Decision – to look into the complaint and get back to the complainant.

2. Internal Monitoring Systems

The company is required to lay out a comprehensive internal governance system with policies, procedures, guides, and regulations, all of which must be ratified by the company’s board of directors. The system must ensure separation of responsibilities and powers in company staff, monitoring the implementation of company policies and governance rules, maintaining accuracy and quality of information, maintaining the following through with company and board decisions. The internal system must operate on two levels: monitoring the technical performance of the company, and auditing.

3. Credit Regulations

The company must put in place a credit policy that is suitable according to targeted markets and consumers, as well as financial products. It must also take into account maximum credit thresholds per consumer and related parties. Company portfolio must be divided as follows: (1) a portfolio of corporate clients (2) a portfolio of SME clients, and (3) a microfinance portfolio. In addition, the company must determine the documents which clients must submit to obtain credit, rules for the credit study and inquiry, as well as clearly set the mechanism for credit decision-making within the company and who is in charge for it. These rules are listed as the minimum which companies have to abide by.

4. Risk Management

The Decision seems to repeat requirements for putting in place an internal policy for risk management in terms of credit, financial adequacy and concentration, collection, liquidity, operational, IT, and sustainability risks. Said policy must define the acceptable level of risk for each of these components. The company must also have an independent risk department, the head of which must satisfy the criteria determined in a previous FRA decision.[3]

5. Information Technology and Telecommunication Systems

Maintaining an adequate IT infrastructure, including systems, databases, and office devices is an FRA requirement. This includes proper data recording, maintaining, and accessibility systems and applications, and that the company maintains an electronic website. Data security policies must be put in place and documents must be maintained backed up on a daily, weekly, and monthly basis. Backup copies are sent to the company’s HR, IT, and Finance departments to maintain in metal safes, and must be sent for storage outside of company headquarters every month.

6. Branch Management

As previously decreed by the FRA, financial leasing/factoring companies cannot open branches except after receiving FRA approval and registering the branch in a special record that is maintained by the FRA. The Decision thus contains the rules for submitting a request to open a branch, the procedures for relocating the headquarters or one of the branches, closure, and FRA procedure for making a decision on the aforementioned. In this respect, FRA Chairman issues the decision to approve or reject the opening or closure of a branch within 10 days from submitting a complete request. The decision is made based on market need and geographical distribution, and on whether the company has committed a violation that is reprimanded by the FRA, and on its diligence in submitting the required disclosures to the FRA within their due timelines. A company that does not commence operation of a given branch after an approval has been issued within six months from the date of said approval risks the lapse of the approval. The same applies to failure to close a branch within three months from the date of the approval to shut down.

7. Reporting

In addition to reporting requirements under applicable laws and regulations (including previous FRA decisions issued on the subject), companies are required to submit monthly periodical data on their operations for the purpose of the FRA’s maintaining of a database of financial leasing and factoring activity. The information that is required to be disclosed differs between the two activities. Financial leasing companies must submit data concerning the volume of financing, current balance of existing contracts, number of clients, projected average interest rate, and average term of contracts. Volume of financing must be distributed according to types of financing, financed assets, client’s economic sector, and governorates. As for factoring companies, the required data concerns – in addition to balance of existing contracts and number of clients - the volume of factored instruments, advance payments, and average financing term in days. Volume of factored instruments and existing balance must be distributed according to client’s economic sector, governorates, whether factoring is granted with right to make claim or without it, and whether it is international or local.   [1] FRA Board of Directors Decision No. 7/2019 on the rules and regulations for companies licensed to undertake financial leasing and factoring, available through this link (in Arabic). [2] Law No. 176/2018 regulating financial leasing and factoring, Official Gazette, Issue No. 32 (bis) (c), 14 August 2018. [3] 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.