Regulatory Alerts2024-11-21 | Finance Business Act Directions No.03 of 2024Deposit Solicitation by Finance Companies
The Central Bank of Sri Lanka issued directions requiring licensed Finance Companies to adhere to standardized deposit solicitation conditions, including internal controls, accurate advertising, and cost-neutral incentive schemes. The regulations mandate that advertisements clearly display nominal and effective interest rates alongside current credit ratings, while prohibiting distorted lottery or introducer schemes that disadvantage depositors. Effective immediately, these directives replace five prior regulations and empower supervisors to enforce interest rate ceilings, real-time transaction proofs, and product revisions to safeguard depositor interests.
GOVERNING BOARD CENTRAL BANK OF SRI LANKA
21 November 2024 | FINANCE BUSINESS ACT DIRECTIONS | No.03 of 2024
DEPOSIT SOLICITATION BY FINANCE COMPANIES
1. Legal provisions In terms of the powers conferred by Section 12(1) of the Finance Business Act, No.42 of 2011 read with Section 133(1) of the Central Bank of Sri Lanka Act, No.16 of 2023, the Central Bank of Sri Lanka (CBSL) hereby issues these directions on deposit solicitation applicable to every Finance Company (FC) licensed under the Finance Business Act, No.42 of 2011.
2. Objectives of the directions The objectives of these directions are to protect depositors and promote fair competition among FCs by specifying the conditions for acceptance of deposits, publishing of advertisements and offering incentive schemes for soliciting deposits. The directions also aim to contribute towards greater efficiency in deposit mobilization by FCs.
3. Applicability These directions will be effective from the date of issuance of these directions to all FCs.
4. Responsibilities of the Board of Directors and Key Responsible Persons 4.1 The Board of Directors (the board) and the relevant Key Responsible Persons of the FC shall be responsible for: a) Approving and implementing internal policies and procedures and maintaining of an effective system of internal controls on the process of deposit account openings, renewals and closures, and publishing of advertisements and offering incentive schemes for soliciting deposits; and b) Complying with other regulatory requirements relevant to deposit solicitation including Know Your Customer Rules, Customer Due Diligence Rules, Guidelines on Anti-Money Laundering and Countering the Financing of Terrorism, Financial Consumer Protection Regulations, etc.
4.2 The board approved internal policies and procedures as referred in Direction 4.1. a) above shall contain minimum the following: a) Types of deposit products the FC can operate and features of various deposit products; b) Operational instructions on deposit account opening, renewals and closure, including minimum documentation, information to be required from the depositors and rules and regulations to comply with; c) Terms and conditions relating to opening, operating and closing of deposit accounts with special nature such as joint accounts, minor accounts, senior citizen accounts, etc.; d) Fees and charges applicable to deposit account openings, renewals and closures; e) Terms and conditions on early withdrawal of time deposits; f) Procedures on dealing with dormant deposits; g) Settlement of deposit accounts of deceased depositor; h) Secrecy of information relating to deposit accounts; i) Minimum information that should be included in the advertisements for soliciting deposits, other minimum conditions that should be adhered to in designing the advertisement and its approval process; and j) Criteria that should be met in operating incentive schemes for soliciting deposits and its approval process.
5. General Conditions for Acceptance of Deposits 5.1 Types of deposits: a) The FC shall not accept any time deposits repayable within a period of less than one month, or after a period of sixty months from the date of receipt of such deposit and shall not renew any time deposits received by it, unless such deposit so renewed is repayable not earlier than one month and not later than sixty months from the date of such renewal. b) The FC may accept savings deposits. c) The FC shall not accept demand deposits. d) The FC may offer any other type of innovative deposit products (such as, recurring deposits¹), provided that the depositors are made aware of the features of such products in a manner not misleading.
5.2 The FC shall provide to every depositor a proof of transaction, on a real time basis, either in print or electronic form as agreed with the depositor, in respect of each and every deposit accepted or renewed, which shall be deemed to be an acknowledgement of acceptance of a certain sum of money by the FC.
5.3 The FC shall maintain records in respect of each and every deposit, sufficient enough to fulfill the FC’s obligations towards its depositors during the course of business, and also to ensure compliance with all regulatory requirements including the requirements on maintenance of depositor information under the Sri Lanka Deposit Insurance Scheme.
5.4 The interest rates offered to deposit products by the FC including any cost of the incentive schemes, introducer commission schemes, or any other schemes promoting deposits shall not exceed the applicable maximum interest rate ceilings imposed by the CBSL, if any.
5.5 The FC shall not convert its deposits into shares or any other financial instruments.
6. Advertisements for Soliciting Deposits 6.1 The FC shall provide accurate and not misleading information (whether written, verbal, audio, visual or audio-visual) in advertisements, marketing material or any material soliciting deposits. All important information should be included in a visible/apprehensible manner to enable the depositors understand such information clearly.
6.2 Every advertisement for soliciting deposits published in print media including newspapers, notices and leaflets, transmitted or broadcasted through audio or audio-visual media, posted in websites, internet and social media, displayed by the FC through hoardings, billboards, banners, pennants and any other form of advertisement directly or indirectly soliciting deposits from the public by the FC shall contain: a) The nominal interest rate and annual effective interest rate in the same font size. b) The fact that such company is a finance company licensed under the Finance Business Act, No. 42 of 2011. c) Latest credit rating assigned to the FC by a credit rating agency acceptable to CBSL. d) A web link to access the FC’s website.
7. Incentive schemes for Soliciting Deposits 7.1 The FC shall not operate lottery schemes, raffle draws, gift schemes (seasonal/promotional) or any other schemes where features of the deposit product are distorted and result in a disadvantageous situation for the depositors, e.g., relatively reduced interest rates on savings deposits, incorporating features of time deposits to savings accounts, etc. In addition, following conditions shall also be applicable: a) All depositors of the specified deposit product category be included in the incentive scheme; b) Cost of the incentive scheme is not charged to the depositors; c) No additional terms and conditions are imposed on depositors with respect to the incentive scheme offered, which are detrimental to the depositors; and d) Clearly communicate all information relevant to the incentive scheme to the depositors.
7.2 The FC shall not operate any introducer commission schemes in soliciting deposits, whereby the cost of such schemes are charged to the depositors.
8. Powers of the Director, Department of Supervision of Non-Bank Financial Institutions Where the Director, Department of Supervision of Non-Bank Financial Institutions (DSNBFI) is of the opinion that the type of deposit, any advertisement for directly or indirectly soliciting deposits or any incentive schemes for soliciting deposits does not comply with the provisions of these directions or mislead the general public, the Director, DSNBFI may direct the FC to revise or terminate such product, advertisement or the incentive scheme, within a specified period of time in the manner specified by the Director, DSNBFI.
9. Definitions 9.1 The following definitions shall be applicable for the purposes of these directions: a) “Time deposit” means any deposit accepted by the FC with an agreement to repay after a specified period of time. b) “Incentive scheme” means an arrangement to confer a monetary or non-monetary benefit on the depositors other than by way of interest. c) “Annual effective interest rate” means the amount of interest expressed as a percentage, a deposit account would earn in a year at a stated interest rate after taking into account the effects of compounding of interest.
10. Revocation of directions/ rule/ guidelines/ circular 10.1 Following directions/ rule/ guidelines/ circular are revoked with effective from the date of issuance of these directions: a) Finance Companies (Deposits) Direction No.01 of 2005 b) Finance Companies (Deposits-Incentive Schemes) Direction No.05 of 2001 c) Finance Companies (Advertisements) Rule No.01 of 2006 d) Finance Companies (Maintenance of Savings Accounts for Minors) Guidelines No.01 of 2007 e) Finance Companies (Insurance of Deposit Liabilities) Direction No.02 of 2010 f) Circular dated 07.10.2013 relating to Finance Companies (Insurance of Deposit Liabilities) Direction No.02 of 2010
(Signature) Dr. P Nandalal Weerasinghe Chairperson of the Governing Board Governor of the Central Bank of Sri Lanka
¹ allows depositors to deposit a fixed amount at regular intervals (usually, monthly) for a predetermined tenure to earn predetermined return on the investment.