8 Apr 2021, 19:34 — 11 min read
For financing and lending companies in the Philippines, some specific rules and requirements prohibit certain activities when seeking to collect borrowers' debts.
In a previous article, we outlined the compliance requirements for registering a financing or lending Company in the Philippines.
However, in this article, we explore what the SEC means by ‘unfair debt collection practices and what financing and lending companies can do to ensure compliance and avoid violations and penalties!
SEC Memorandum Circular No. 18, Series of 2019
In August 2019, the SEC issued Memorandum Circular No. 18, Series of 2019, entitled “Prohibition on Unfair Debt Collection Practices of Financing Companies (FC) and Lending Companies (LC)”.
M.C. 18 of 2019 is directed at all financing and lending companies in the Philippines!
M.C. 18 of 2019 seeks to prevent financing companies and lending companies from harassing borrowers and engaging in unethical, abusive, and/or unfair practices when seeking to collect debts.
This prohibition applies whether the company seeks to collect the debts itself or via a third-party service provider.
Why did the SEC release a Memorandum on Unfair Debt Collection Practices?
M.C. 18 of 2019 identifies two main reasons why the SEC believes it necessary to issue rules and prohibitions on certain debt collection practices:
In light of the above, M.C. 18 of 2019 was issued by the SEC in August 2019 and took effect very shortly after.
What is an ‘Unfair Collection Practice’?
First of all, it’s important to note that the SEC is not preventing financing or lending companies (or. Indeed, their third-party debt collection providers) from collecting debts from borrowers who are properly due and owing to them under the original loan agreement.
This is provided that the companies seek to collect debts in a reasonable and legally permissible manner.
However, the SEC wants to ensure that all such debt collection practices observe the principle of good faith and reasonable conduct! In particular, the SEC seeks to prevent companies from engaging in debt collection practices that amount to “unscrupulous and untoward acts.”
In light of this, the SEC lists out some examples of what will constitute an “Unfair Collection Practice”, as outlined below:
The SEC states that this list is not meant to be limited or exhaustive. With that in mind, Financing and Lending Companies must ensure at all times that their debt collection practices are conducted in good faith, with reasonable conduct, and must refrain from engaging in unscrupulous and/or untoward acts!
Keep borrower information confidential!
From the perspective of debt collection, M.C. 18 of 2019 requires that lending and financing companies must keep all customer information strictly confidential!
However, M.C. 18 of 2019 does outline several exceptions to that confidentiality requirement. Customer information can be disclosed where:
Outsourcing of debt collection services
M.C. 18 of 2019 does not prohibit the outsourcing of debt collection to a third party! The Memorandum merely outlines where the ultimate responsibility rests if a third-party debt collection agency is engaged.
So, outsourcing of debt collection practices is still allowed. Any third-party debt collection service provider engaged by a Financing or Lending Company will be deemed an “agent” of the company.
As such, the ultimate responsibility for compliance with proper debt collection practices (and in particular, M.C. 18 of 2019) will always remain with the Financing or Lending Company.
Mandatory Policies and Procedures for Handling Customers/Borrowers!
M.C. 18 of 2019 requires Financing and Lending Companies to adopt policies and procedures for any personnel required to handle the collection of debts to disclose their full name and true identity to the relevant borrower.
The above requirement relates to both in-house collectors and third-party provider collection agencies.
Financing and Lending Companies are also required to establish a Customer Service function responsible for promptly addressing borrower queries, concerns, and complaints.
Importantly, M.C. 18 of 2019 requires that the President or CEO and the Compliance Officer of a Financing and Lending Company sign and submit a sworn certificate stating that they have complied with these specific requirements!
For further information on the compliance requirements relating to this sworn certificate, you can check out a recently issued clarification by the SEC here – SEC Clarifies Compliance Requirements for Newly Registered Financing and Lending Companies in the Philippines.
Penalties under M.C. 18 of 2019
The SEC has also outlined the relevant penalties for violation of M.C. 18 of 2019, as outlined below. Violations will be determined on a “per loan transaction per complainant” basis.
Finally, Financing and Lending Companies should be aware that the above penalties' imposition does not prevent the SEC from imposing additional penalties under any other form of legislation that might apply to Financing or Lending Companies or their directors or officers. For example, penalties and sanctions might also be imposed under the Philippines' Revised Corporation Code, depending on the specific circumstances.
CloudCfo – digital accounting and bookkeeping services in Metro Manila and the Philippines
CloudCfo works with financing companies and lending companies across the Philippines!
For business models based on high-volume/low-value transactions daily, we are experts at helping companies develop process-driven and output-focused practices to ensure that their Loan Management System (LMS) aligns and works efficiently with their bank-end finance function!
Contact us directly via firstname.lastname@example.org or visit www.cloudcfo.ph Find out all you need to know about CloudCfo’s accounting and bookkeeping services for startups and small businesses in the Philippines!
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NOTE: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.
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