The Bank of Thailand (BOT) and the Fiscal Policy Office have drafted a royal decree that will regulate the hire purchase and leasing of cars and motorcycles under the Financial Institution Business Act B.E. 2551 (2008).
This draft royal decree, which comes at a time when the level of household debt is surging in Thailand, aims to address the rise in outstanding debts related to hire purchase and leasing of cars and motorcycles. In recent years, there has been growing concern about such financing for cars and motorcycles, as these arrangements conducted by non-banks are currently unregulated and have sparked many public complaints relating to fees and practices.
Scope of Regulated Businesses
By virtue of the draft royal decree, businesses carrying out hire purchase and leasing of cars and motorcycles will become regulated businesses under the Financial Institution Business Act B.E. 2551 (2008).
The draft royal decree defines “hire purchase” and “leasing” as follows:
- “Hire purchase” refers to hire purchase of cars and motorcycles according to the Civil and Commercial Code—that is, a contract whereby an owner of a car or motorcycle hires out the vehicle to a customer, and either promises to sell it to the customer or promises that it will become the property of the customer, on the condition that the customer makes a certain number of payments.
- “Leasing” refers to renting of a car or motorcycle under a financial lease contract in which the lessor procures a car or motorcycle according to the lessee’s request from a manufacturer, distributor, or other party, or a car or motorcycle repossessed from another lessee, in order to allow the lessee to utilize the vehicle. The lessee is obligated to maintain and repair the leased car or motorcycle during the leasing term. However, the lessee cannot terminate the contract unilaterally before maturity. Upon the expiration of the contract, the right to purchase the leased asset is subject to an agreement between lessor and lessee.
The draft royal decree is expected to mostly affect non-bank business operators and entities engaging in hire purchase and leasing of cars and motorcycles, which at present are not regulated under any particular law by any authority. It does not apply to financial institutions and specialized financial institutions under the law on financial institutions, business operators under other laws that are regulated and monitored by a specific government agency, and business operators that are not juristic persons.
The key requirements of the draft royal decree are described below.
- Business operators must disclose certain details (e.g., applicable interest rate, discount rate, service fees, etc.) at their places of business, and submit reports to the BOT, in accordance with the criteria to be announced by the BOT. They must also inform the public of calculation methods and details of annual service fees.
- The draft royal decree empowers the BOT to announce standards with which business operators must comply. These standards may include a broad range of topics, such as contract execution and performance, guarantees (with unlimited guarantees being prohibited, and principal being specified), unilaterally making changes to a contract, disclosure of businesses’ operating details, and other operations relating to hire purchase and leasing of cars and motorcycles.
- The BOT may announce criteria for the methods for calculating the annual service fee.
- If there is reasonable cause, the BOT may announce standards related to interest rates, discount rates, service fees, deposits, and penalties that business operators may request or offer to consumers.
In cases of noncompliance, the BOT can issue a warning letter or an order prohibiting the offending action or providing instructions for compliance. If business operations are deemed likely to cause harm to the public, the BOT may order operators to correct their operations or to temporarily cease some or all business operations. Fines and imprisonment for violation of some provisions are also stipulated as penalties in the draft royal decree.
The BOT recently completed a public hearing period for the draft royal decree, and is currently in the proposing and approval process. According to the current draft royal decree, the royal decree will become effective after 180 days from its publication date.
For further information, please contact:
Santhapat Periera, Partner, Tilleke & Gibbins