SEC RELEASES DRAFT IMPLEMENTING RULES OF FINANCIAL CONSUMER PROTECTION LAW
The Securities and Exchange Commission (SEC) has released the draft Implementing Rules and Regulations (IRR) of Republic Act No. 11765, or the Financial Products and Services Consumer Protection Act (FCPA), for public comment.
The draft IRR will operationalize the newly signed law that aims to protect the interests of financial consumers by strengthening the country’s financial regulators by providing them with rule-making, surveillance, inspection, market monitoring, and more enforcement powers.
Former President Rodrigo R. Duterte approved the measure on May 6, 2022, as part of efforts to ensure that mechanisms in line with global best practices are in place to protect consumers of financial products and services.
The SEC, as well as the Bangko Sentral ng Pilipinas (BSP) and Insurance Commission (IC), have the authority to issue its own standard and rules for the application of the provisions of the new law within its jurisdiction.
The draft rules will cover all financial products and services and financial service providers under the jurisdiction of the SEC. These financial products and services include credit, securities, and investments, including digital financial products or services which pertain to the broad range of financial services accessed and delivered through digital channels.
The proposed guidelines provide that securities, beyond their definition under Section 3.1 of Republic Act No. 8799, or the Securities Regulation Code (SRC), shall include “tokenized securities products,” or those which grew with the abstraction of key characteristics from cryptocurrency’s underlying distributed ledger technology to apply in the traditional financial sector.
Powers of the SEC
The draft rules expand the enforcement actions that may be conducted by the SEC, which shall include the restriction on the ability of the financial service provider to collect excessive or unreasonable interests, fees, or charges; disqualification and/or suspension of directors, trustees, officers, or employees; imposition of fines, suspension or penalties; issuance of cease and desist orders; suspension of operation; and disgorgement.
The SEC may enter an order requiring accounting and disgorgement of profits obtained, or losses avoided, as a result of a violation of the FCPA and other existing laws, including reasonable interest, in addition to penalties it may impose for such violation.
The draft IRR authorizes the Commission to further adopt rules and regulations concerning the creation and operation of a disgorgement fund, payments to financial consumers, rate of interest, period of accrual, and other matters related to the disgorgement fund.
Persons who violate provisions of the FCPA or the rules pursuant to its implementation will be punished by imprisonment of not less than one year, but not more than five years, or by a fine of not less than P50,000 but not more than P2 million or both, at the discretion of the court
Should the violation be committed by a corporation or a juridical entity, the directors, officers, employees, or other officers who are directly responsible for such violation shall be held liable thereto.
Persons found responsible for investment fraud may also be subject to administrative sanctions, from a fine of P50,000 to P10 million for each instance of investment fraud plus not more than P10,000 for each day of continuing violation, in addition to other administrative sanctions under Section 54 of the SRC.
In case profit is gained or loss is avoided as a result of the violation of the FCPA or investment fraud, a fine not more than three times the profit gained or loss avoided may also be imposed by the SEC. In addition to the administrative sanctions that may be imposed, the authority of the financial service provider to operate in relation to a particular financial product or service may likewise be suspended or cancelled.
The SEC may institute an independent civil action on behalf of aggrieved financial consumers for violations of the FCPA and its IRR, depending on the nature, effects, frequency, and seriousness of the violation.
Should the SEC obtain a civil penalty against any person or entity, the amount of the civil penalty shall be added to and become part of a disgorgement fund or other funds established for the benefit of the aggrieved financial consumer.
In addition, the Commission shall have the authority to adjudicate actions arising from or in connection with financial transactions that are purely civil in nature, and the claim or relief prayed for by the financial consumer is solely for payment or reimbursement of sum of money not exceeding the amount of P10 million.
The proposed rules likewise seek to regulate persons engaged in the business of or acting as an investment adviser in the country, as well as those who represent or identify themselves as investment advisers or make use of the words “Investment Adviser” or “Financial Adviser” or variations thereof, unless they are registered with the Commission.
An investment adviser shall refer to any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, whether electronically or in any other form, as to the value of investment products or as to the advisability of investing in, purchasing, or selling investment products, or who, for compensation and as part of a regular business, issues, or promulgates analyses or reports concerning investment products.
The SEC will be issuing a separate memorandum circular on the regulation of investment advisers. All persons acting as investment advisers will be required to register with the Commission within 90 days from the issuance of such rules.
Financial consumer protection
The draft guidelines will require financial service providers to integrate a Consumer Protection Risk Management System (CPRMS) into its enterprise-wide risk management processes and risk governance framework. The CPRMS includes the governance structure, policies, processes, measurement, and control procedures to ensure that consumer protection risks are identified, measured, monitored, and mitigated.
The board of directors of each company shall be primarily responsible for approving and overseeing the implementation of the CPRMS.
Financial service providers are also directed to establish a Financial Consumer Protection Assistance Mechanism (FCPAM), for free assistance to financial consumers on financial transaction concerns, including complaints, inquiries, and requests.
Through the FCPAM, financial consumers will be provided accessible, affordable, independent, fair, accountable, timely, and efficient means for resolving complaints. Those unsatisfied with the financial service provider’s handling of complaints may elevate their concerns to the SEC.
The draft rules will further provide additional protection to financial consumers by requiring financial service providers to continuously evaluate their financial products or services to ensure that they are appropriately targeted to the needs, understanding, and capacity of both their markets and their clients.
To ensure the client’s full awareness of a financial product, the SEC may require financial service providers to adopt and implement a clear cooling-off policy, under which the financial consumer will be allowed time to consider the costs and risks of a financial product or service, free from the pressure of the sales team of the financial service provider.
The draft rules also reiterate the Commission’s prohibition on the employment of abusive collection or debt recovery practices.
Financial service providers or their collection agencies, counsels and other authorized third-party agents, may resort to all reasonable and legally permissible means to collect amounts due them. However, in doing so, they must observe good faith and reasonable conduct and refrain from engaging in unscrupulous or untoward acts.
Abusive debt collection practices include the use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person; the use of threats to take any action that cannot legally be taken; and the use of obscenities, insults, or profane language to abuse the financial consumer, among others.
On the other hand, financial consumers may prepay a loan or other credit transaction at any time prior to the agreed maturity date. Financial service providers shall charge only the reasonable administrative costs of the early payment.
The draft Implementing Rules and Regulations of the FCPA may be accessed through the SEC website. All interested parties have until February 7, 2023 to submit their comments to the SEC Enforcement and Investor Protection Department at firstname.lastname@example.org.