SEC Issues Regulations to Implement Financial Consumer Protection Act
On 25 April 2023, the Securities and Exchange Commission (“SEC”) issued Memorandum Circular No. 5, series of 2023 (link here) and adopted the SEC Rules and Regulations of the Financial Products and Services Consumer Protection Act of 2022 (“SEC FCPA IRR”) to implement Republic Act No. 11765 (the Financial Products and Services Consumer Protection Act (“FCPA”) – link to Official Gazette version is here).
The SEC FCPA IRR took effect on May 14, 2023. Some of the more relevant points of the SEC FCPA IRR are discussed below.
1. What is the scope and coverage of the SEC FCPA IRR?
The SEC FCPA IRR shall apply to all “financial products and services” and “financial service providers” (as defined below) which are under the jurisdiction of the SEC.
Note that the Bangko Sentral ng Pilipinas (“BSP”) has issued a separate set of regulations to implement the FCPA as it applies to banks and other persons that provide financial products or services under the jurisdiction of the BSP (see discussion here). The FCPA also mandates the Insurance Commission and Cooperative Development Authority to issue regulations to implement the FCPA as it applies to insurance companies and cooperatives.
2. What are considered “financial products or services” under the SEC FCPA IRR? Which persons are considered “financial service providers” under the SEC FCPA IRR?
The term “financial products or services” refers to those products or services which are developed and/or marketed by a financial service provider which may include, but are not limited to, credit, securities, investments, and other similar products and services. This also includes digital financial products or services, which pertain to the broad range of financial services accessed and delivered through digital channels.
The foregoing definition is similar to the definition of adopted by the BSP in its Circular No. 1160 implementing the FCPA (“BSP FCPA IRR”), except that the BSP FCPA IRR included “fund transfers, trust products, loans, payments, and remittances” in its definition. Moreover, the BSP FCPA IRR limits financial products and services to those created, developed, and/o marketed by BSP-supervised institutions (“BSIs”).
The SEC FCPA IRR also defines the term “financial service provider” (or “FSP”) as any person, natural or juridical, which provides financial products or services that are under the jurisdiction of the SEC. These include (but are not limited to): (i) issuers and/or offerors of securities, securities brokers, dealers, and salesmen, associated person of a broker or dealer, investment houses and other similar entities managing securities, or rendering similar services; (ii) investment company advisers/fund managers, mutual fund distributors, investment companies (e.g., mutual funds); (iii) investment advisers; and (iv) financing and lending companies.
3. Who are investment advisers? Are they required to be registered with the SEC?
An “investment adviser” is 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.
Those who offer and/or sell financial products and services having investment components or purported as an investment product by itself or as a part of another financial product or service, are also considered investment advisers (or engaged in acts pertaining to that of an investment adviser).
Investment advisers are required to register with the SEC pursuant to the provisions of the FCPA and the SEC FCPA IRR and other regulations issued by the SEC. Unless registered as investment adviser under the SEC, a person cannot represent or identify himself or herself as an investment adviser or make use of the words “investment adviser” or “financial adviser” or variations thereof descriptive of a position or title.
All persons acting as investment advisers as of May 14, 2023 (the effective date of the SEC FCPA IRR) may continue functioning as such provided that they file with the SEC, within 90 days from May 14, 2023, an undertaking signifying their intent to register as investment adviser, in accordance with the requirements and procedures to be prescribed by the SEC. Failure to file such undertaking within the prescribed period will render their operation in violation of the FCPA and the SEC FCPA IRR.
4. What are the duties and responsibilities of FSPs?
In general terms, FSPs are required to comply with the following:
(a) the board of directors and senior management of the FSP should exercise oversight and ensure conformity of its operations with the provisions of the FCPA and the SEC FCPA IRR,
(b) establish and implement a Consumer Protection Risk Management System (“CPRMS”) that ensures identified risks to the FSP and the associated risk of financial harm or loss to consumers are properly managed,
(c) ensure appropriate product design and delivery appropriately targeted to the needs, understanding, and capacity of both their markets and their clients,
(d) comply with the following Consumer Protection Standards of Conduct, among others:
i. transparency, disclosure, and responsible pricing;
ii. fair and respectful treatment of clients;
iii. prohibition on employment of abusive collection or debt recovery,
iv. privacy and protection of client data; and
v. establish a Financial Consumer Protection Assistance Mechanism, and vi. adopt and implement information and security standards.
5. What is the “cooling-off period”?
Under the SEC FCPA IRR, the SEC may require FSPs providing certain products and services to grant their financial consumers a certain “cooling-off period” within which they may consider the costs and risks of a financial product or service free from the pressure of the sales team of the FSP, and to cancel the agreement without penalty.
The length of the cooling-off period is be determined by the FSP but should in no case be less than three business days (or such other period as may be prescribed by the SEC) immediately following the execution of any agreement or contract.
The cooling-off period requirement does not apply to transactions involving the following:
(a) shares or units of participation of investment companies;
(b) securities traded in exchanges, organized over-the-counter markets and alternative trading systems;
(c) securities sold to qualified buyers;
(d) securities sold through crowdfunding intermediaries; and
(e) such other transactions, products and services as may be determined by the SEC.
6. What are the penalties imposed for non-compliance with the FCPA under the SEC FCPA IRR?
Persons violating the FCPA, and its implementing regulations may be punished by imprisonment for a minimum of one year to a maximum of five years, or by fine ranging from PhP50,000 to PhP2,000,000, or both, at the discretion of the court. If the violation is committed by a corporation or a juridical entity, the directors , officers, employees, or other officers directly responsible for the violation will be liable.
However, in case of investment fraud, the SEC may impose a fine ranging from PhP50,000 to PhP10,000,000 for each instance of investment fraud plus a maximum of PhP10,000 for each day of continuing violation. In case profit is gained or loss is avoided as a result of the violation of the FCPA or investment fraud, a fine of not more than thrice the profit gained or loss avoided may be imposed by the financial regulators.
In addition, the SEC may also (among other available remedies): (a) restrict an FSP’s ability to collect excessive or unreasonable interest, fees, or charges; or (b) require an FSP to render an accounting of and disgorge any profits obtained or losses avoided in violation of the FCPA and implementing rules.
The SEC may institute an independent civil action on behalf of aggrieved financial consumers for violations of the FCPA and the SEC FCPA IRR.
You may download the SyCipLaw Banking Bulletin June 2023 issue here or via this link.
