DOJ Opinion No. 046, s. 2001

DOJ OPINION NO. 046 , s. 2001 September 17, 2001 Hon. Lilia R. Bautista Chairman Securities and Exchange Commission SEC Bldg., EDSA, Greenhills Mandaluyong City M a d a m : This refers to your request for a "definite ruling" on the issue of whether it should be the Bangko Sentral ng Pilipinas (BSP) or the Securities and Exchange Commission (SEC) which should assume jurisdiction to regulate the operation of "lending investors" (direct lending). The request, it appears, is raised in connection with the interpretation of the provisions of Republic Act No. 5980, also known as the "Financing Company Act", as further amended by R.A. No. 8556, or the "Financing Company Act of 1998", specifically Section 3(a) thereof which reads, to wit: "SECTION 3. Definition of Terms . As used in this Act, the term: (a) Financing Companies hereinafter called companies, are corporations , except banks, investment houses, saving and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises, by direct lending , or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases , chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property." (emphasis supplied) You state that pursuant to Section 130 of R.A. No. 7653 (The New Central Bank Act), the regulatory powers of the BSP over "non-bank financial intermediaries" without quasi-banking functions had been transferred to the SEC; that there is, however, a doubt on whether the SEC, by virtue of said provision, has been given jurisdiction over lending investors engaged in "direct lending" and, consequently, authority to issue rules and regulations governing said business activity since there is no law expressly conferring upon the SEC such power; and that you feel that no BSP regulatory power over direct lending was transferred to the SEC because prior to R.A. No. 7653, the BSP exercised merely monitoring not regulatory power. You also state that the earlier quoted provision of R.A. No. 5980, as further amended by R.A. No. 8556, is clear that direct lending is a financial activity "subject to the provisions of the Financing Company Act and to be regulated by the SEC." Considering, however, the belief of others that "direct lending" activity is more of a "banking" activity, which should be placed under the jurisdiction of the BSP rather than the SEC, and considering also that the General Banking Law of 2000 (R.A. No. 8791) is silent on the matter, you now refer the matter to us for a definite ruling. The New Central Bank Act (R.A. No. 7653), insofar as material reads: "SECTION 3. Responsibility and Primary Objective . The Bangko Sentral shall provide policy directions in the areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, hereafter referred to as quasi-banks, and institutions performing similar functions ." xxx xxx xxx "SECTION 130. Phase-Out of Regulatory Powers Over the Operations of Finance Corporations and Other Institutions Performing Similar Functions . The Bangko Sentral shall . . . phase out its regulatory powers over finance companies without quasi-banking functions and other institutions performing similar functions as provided in existing laws , the same to be assumed by the Securities and Exchange Commission." (emphasis ours) Upon the other hand, Republic Act No. 8791 (the General Banking Act of 2000) pertinently provides: DSEIcT "SECTION 4. Supervisory Powers . The operations and activities of banks shall be subject to supervision of the Bangko Sentral. xxx xxx xxx " The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks , trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. "For purposes of this Act, ' quasi-banks ' shall refer to entitles engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the 'New Central Bank Act') for purposes of relending or purchasing of receivables and other obligations." "SECTION 6. Authority to Engage in Banking and Quasi-Banking . No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral : . . ." (emphasis supplied) By clear and express provisions of both R.A. No. 7653 and R.A. No. 8791, the supervisory authority/regulatory power of the BSP has been restricted to banks and entities performing quasi-banking functions and institutions performing similar functions, while the supervision and regulatory powers over entities/institutions without quasi-banking functions have been given to the SEC (see Secs. 3 and 130, R.A. No. 7653; Secs. 4 and 6, R.A. No. 8791 [ supra ]). The specific question raised is whether "lending investors" which are engaged in direct lending are subject to the regulatory jurisdiction of the BSP or the SEC. Our view is that if the lending investor is not engaged in quasi-banking, then it is to be regulated by the SEC, but if it is engaged in quasi-banking, then the BSP is the proper regulatory agency over such lending investor. Quasi-banking is an activity which involves " the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (. . . 'New Central Bank Act') for purposes of relending or purchasing of receivables and other obligations " (Sec. 4, R.A. No. 8791, supra ). The regulatory jurisdiction of the BSP over "quasi-banks" or finance companies and non-bank financial institutions engaged in "quasi-banking" is clearly defined and delineated in both R.A. No. 7653 (New Central Bank Act) and R.A. No. 8791 (General Banking Act of 2000). Section 3 of R.A. No. 7653 ( supra ) expressly provides that the BSP shall exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions engaged in quasi-banking functions", while Section 130 of the same Act (also supra ) expressly provides for the transfer of BSP's regulatory powers over "finance companies without quasi-banking functions and other institutions performing similar functions" to the SEC. The regulatory jurisdiction of the BSP over quasi-banks is reiterated in Section 4 of R.A. No. 8791 and which provision sub-silencio affirms the regulatory jurisdiction of the SEC over finance companies and other institutions "without quasi-banking functions". Thus, when Section 3 (a) of R.A. No. 8556 (The Financing Company Act of 1998) defines "Financing Companies" as "corporations, except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other similar financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities . . . by direct lending . . ." the definition is deemed to include "finance companies without quasi-banking functions" and to exclude "finance companies and non-bank financial institutions performing quasi-banking functions" (see also Secs. 3 and 130, R.A. No. 7653 and Sec. 4, R.A. No. 8791). Accordingly, insofar as lending investors perform the functions of a financing company as defined in Section 3 (a) and do not perform quasi-banking functions, then such lending investors fall within the regulatory jurisdiction of the SEC. If the lending investor is engaged in quasi-banking, the BSP would have regulatory jurisdiction over its activities. In this connection, it is pertinent to note the provision of Section 4 of R.A. No. 8556 (which amends Section 4 of R.A. No. 5980) which defines the implementing authority of the SEC. It provides: "SECTION 4. Grant of Authority to Securities and Exchange Commission . The Securities and Exchange Commission is hereby empowered to enforce the provisions of this Act and issue implementing regulations except insofar as the Bangko Sentral may have supervisory authority under the provisions of Republic Act No . 7653 with respect to financing companies licensed to perform quasi-banking functions , and insofar as the Monetary Board has authority to prescribe financing company rates and charges under Section 5 hereof." (Emphasis supplied.) Please be guided accordingly. EASCDH Very truly yours, (SGD.) HERNANDO B. PEREZ Secretary