01 November, 2007
Draft Finance Company Act Sent to Legislature
Taiwan's Executive Yuan approved its long-awaited draft of the Finance Company Act on Oct. 31st. Drafts of the Act have been circulating between various agencies for more than ten years as the government has tried to find the right formula to meet its two major policy objectives for the legislation: providing new non-bank sources of financing for Taiwan's many and effectively regulating underground loan businesses by allowing at least some to legalize.
According to coverage in the Chinese-language China Times, the Act permits finance companies to make loans, guarantee contractual performance, and discount bills. While maximum annual interest rates for consumers are capped at the 20 percent, corporate interest rates can be as high as 30 percent.
New finance companies will require a permit from the Financial Supervisory Commission to register as a finance company. The Commission will then issue a business license to the duly registered finance company. The draft Act gives the Commission the power to set capital requirements for finance companies, and officials suggested that minimum capitalization could be set at around NT$5 billion (c. US$150 million), noting that in 2006 Taiwan had 48 firms of this scale legally engaged in financing transactions or leasing.
The Act provides that companies currently approved to operate financed leasing, installment purchasing, and accounts receivable financing for ordinary businesses or financial institutions are eligible to become general purpose finance companies.
One of the major purposes of the Finance Companies Act is to regulate Taiwan's underground loan businesses that often employ collection agencies with organized crime backgrounds. Larger illegal loan operations will now have the opportunity to become legal, but the draft Act imposes administrative fines of NT$500,000 (c. US$15,000) to NT$2,500,000 (c. US$75,000) on finance companies that collect debts using force, threats, or invasions of privacy or outsource collections to any third party that engages in these practices.
The draft Act also provides that finance contracts must be written and are void if they set an interest rate above statutory maximums. In addition, finance companies must provide a copy of the written agreement to the guarantor of any finance contract upon request and also must accept early repayment of principal. Without permission from the regulator, finance companies cannot outsource collections or assign debt to third parties.
Finance companies will be required to use the word 'finance' in the names of their firms, and their sales people will need to register with the Finance Company Industry Association.
In related coverage, the paper also interviewed Chailease Finance Co. Ltd.'s Chen Feng-long (陳鳳龍), who said that his firm believed that demand for non-bank financing was worth between NT$300 (US$9.2 billion) and NT$500 billion (US$15.4 billion). Chailease is Taiwan's largest leasing firm. Chen said that if the Legislature passed the draft Act, his firm will apply to become a finance company.
Chen explained that the 24 members of the Finance Company Industry Association are currently allowed to engage only in asset-based financing for corporate customers. Under the draft Act, they would be able to do direct financing as well as lend to consumers. Another important change is that currently a leasing company's total lending capacity to corporate customers is capped at 40% of its net assets. The draft Act does away with that cap.
The draft Act must now be passed by the Legislature to become law. It is expected that although legislators representing various interest groups affected by the draft Act will introduce amendments and possibly alternative versions, there is reason for optimism that it could be passed by the end of the year due to strong industry support.
For more information on the draft or the legislative process, please contact Steve Hanley at +886-2-2311-2345 ext. 620.
