THE CBN’S OPERATIONAL GUIDELINES ON GLOBAL STANDING INSTRUCTION: LEGAL MATTERS FOR CONSIDERATION

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In our newsletter of 17th July, 2020, we discussed the Operational Guidelines on Global Standing Instruction (“Guidelines”) recently issued by the Central Bank of Nigeria (“CBN”), its applicability, its triggering criteria and its potential impact on loan repayments by individual debtors. The CBN issued the Guidelines for the purpose of ensuring that debtors contractually authorize creditor financial institutions to set-off any unpaid debts by applying proceeds from any or all accounts operated by the customers across all Participating Financial Institutions licensed by the CBN. In today’s newsletter, we discuss in brief detail, some legal considerations which may arise from the application of the Guidelines. Below are some of the key legal considerations which are worthy of note:

 

What is the effect of a Global Standing Instruction (“GSI”) on accounts operated in joint ownership?

The Guidelines identify various types of accounts in respect of which a GSI can be activated. Whilst the GSI is only applicable to accounts operated by individuals, the Guidelines specifically seek to operate against accounts operated by debtors in conjunction with third parties, notwithstanding that the third parties may not be parties or beneficiaries of contractual relationships between a debtor, who is a joint account owner and the creditor financial institution.

Since the relationship between banks and their customers are contractual- in this case, a debtor and a creditor, the application of the GSI appears to deviate from the general principle of privity of contract which states that a person who is not party to a contract cannot be bound by the terms of that contract.

Consequently, in the absence of any legal agreement or written consent by a joint account holder, it becomes apparent that a question of the legality of the GSI and its application on joint account ownership arises. It is therefore unclear how the GSI will operate in this regard without violation of rights of joint account holders by the creditor.

 

How can potential disputes arising from a GSI mandate be resolved?

It is not unusual that potential disputes will arise in a debtor-creditor relationship, especially in relation to issues affecting excess bank charges and unauthorised debits. In the Guidelines, reference is made to an Arbitrator being ”… a person appointed to resolve a dispute between two parties by arbitration…” While it is not clear in what instances an Arbitrator may be appointed, or by what means, the language of the Guidelines suggest that an arbitration agreement may exist between Participating Financial Institutions/Bank and debtors and an Arbitrator may be appointed where there is a dispute in connection with an alleged wrongful GSI activation.  It is, however, uncertain whether Banks will be compelled to include arbitration clauses in their GSI mandates with customers. Assuming that this is the case, this potentially creates a restriction on the contractual right of parties to decide the forum for settling commercial disputes and ultimately, the rights of parties to the freedom of contract.

 

Are there any punitive measures against arbitrary activation of a GSI?

In addition to a fixed fine applicable to creditor banks for erroneous GSI activations, the Guidelines also specify that where an Arbitrator rules against a creditor bank for a disputed GSI transaction, the creditor bank shall also pay a fine of N10,000,000 (Ten Million Naira) or 10% of the disputed sum, whichever is greater.

This provision, it is believed will ensure that Participating Financial Institutions adhere strictly to the provisions of the Guidelines and that their powers to activate the GSI are not abused, thereby protecting the interest of debtors.

Conclusion

The ultimate purpose of the Guidelines is to increase creditor confidence by reducing non-performing loans. Prior to its proposed effective date (August 1, 2020), it is important that the highlighted legal issues be duly considered by the CBN to avoid a floodgate of disputes arising from the application of the Guidelines.

 

 

 

Loan Recovery in Nigeria – The Recent Central Bank of Nigeria Policy

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Access to credit in Nigeria has been low for a while, with the Central Bank of Nigeria affirming that only 5.3% of the adult population have access to finance. There are many reasons for this including high interest rates deterring borrowers and high rates of default on loans deterring creditors.

In a bid to reduce the high rate of defaults by borrowers, enhance loan recovery by financial institutions and generally improve creditor confidence in Nigeria, on July 13, 2020, the Central Bank of Nigeria (CBN) released Guidelines[i] on Global Standing Instruction (the “Guidelines”). Below are key points from the Guidelines.

What is a Global Standing Instruction? Global Standing Instruction (GSI) is a mandate or an instruction to be executed by a borrower authorizing financial institutions to recover a borrower’s debt from any or all accounts maintained by that borrower across various participating financial institutions through a direct set-off from deposits/investments held in those financial institutions.

What Financial Institutions can offer a GSI to a Borrower? All financial institutions in Nigeria licensed by the CBN including commercial banks, microfinance banks, finance companies, mortgage banks, and investment banks (“Financial Institutions”).

Does it apply to Individuals or Companies? The current guidelines apply to borrowers who are individuals and not companies. We expect that guidelines for company debtors would be issued by the CBN in due course.

How does the GSI work? Borrowers are to execute a GSI mandate/authorization in hard copy or digital when taking a loan from a Financial Institution. Where the Borrower defaults on the loan, the Financial Institution would be entitled to deduct the money owed plus interest due from any other personal account, joint account or child account in any other Financial Institution, linked to the borrower’s BVN (Bank Verification number)[ii].

When can a GSI be triggered? Where a Financial Institution is unable to recover debt through other means, the institution may trigger the GSI and the Nigerian Inter-Bank Settlement System will proceed to debit the Borrower’s accounts across various Financial Institutions. A GSI is to serve as a last resort by a Financial Institution and can only be used to recover the principal loan amount and accrued interest only (not penalty interests).

Can a GSI be triggered over a joint account? Yes. However, the CBN may need to clarify how GSIs are to work in relation to joint accounts. Where a GSI is triggered over a borrower’s joint account with a third party, how would the rights of the third party to the funds in the account be protected?

What happens if a GSI is triggered in error? The Guidelines provide for penalties where it is established that a Financial institution breached the provisions of the Guidelines. For example, where a Financial Institution activates a GSI in error, the bank will pay a flat fine of ₦500,000.00 and bear all liability from such erroneous GSI activation.

When will the GSI take effect? The Guidelines are to take effect from August 1, 2020 and will be applicable on all loans granted from August 28, 2019.

Conclusion.

The GSI is a good initiative which should help improve creditor confidence in the Nigerian credit system. It would also be beneficial to fintechs in Nigeria who utilize microfinance bank licences[iii] to offer credit facilities such as payday or small business loans. Fintechs/creditors who offer loans with the use of a moneylender’s license[iv]  are, however not permitted to use GSIs. Since such money lenders play a major role in improving access to credit in Nigeria, particularly to individuals, it would be useful for similar regulations to be put in place for their benefit.

[i] You can access our articles on previous guidelines issued by the CBN by clicking on this link https://pavestoneslegal.com/tag/central-bank-of-nigeria/

[ii] The CBN had previously indicated that BVNs would be utilized to assist in the recovery of loans. Please access our articles on this here https://pavestoneslegal.com/tag/bvn/

[iii] Find more articles on microfinance banks in Nigeria here  https://pavestoneslegal.com/tag/microfinance-banks/

[iv] Please access our article on Money lending services here https://pavestoneslegal.com/tag/money-lending/

Key highlights of the FIRS Circular on the Application of Stamp Duty Tax in Nigeria

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On 29 June 2020, Access Bank Plc., a tier one financial institution in Nigeria, issued a statement to its customers, promising to refund the stamp duty charges it had deducted from their accounts over the weekend. This came after the institution had notified its customers of a mistake in its operations records, wherein the bank omitted to pass the stamp duty tax on applicable transactions accrued between 1 February, 2020 and 30 April, 2020 to its customers, and instead, deducted the accumulated charge from their accounts. This was immediately followed by social media outrage on the purported illegality of such actions. While it is debatable whether the bank should have retroactively deducted such funds, the Bank’s actions were in line with the provisions of the Finance Act 2020 (Stamp Duty Act, CAP S8) (“FA”).

The FA amended Section 2 of the Stamp Duty Act  (“SDA”), by expanding the scope of the SDA’s definition of instruments liable to stamp duties, to include “electronic documents”. The FA, however, failed to provide clarity on the definition of the term. In response to this omission, the Federal Inland Revenue Service (“FIRS”) published an Information Circular (“the Circular”) on 29 April 2020 to provide clarity on the amendments introduced by the FA. The Circular also provided implementation guidelines to aid taxpayers in the remittance of their stamp duty taxes. We will therefore examine key highlights of the Circular below.

Instruments liable to Stamp Duties

The Circular provides clarity on the scope of instruments liable to be stamped, by specifically stating that written or printed dutiable instruments or receipts, Point of Sale (POS) receipts, Automated Teller Machine (ATM) printouts, receipts in form of SMS, Instant Messaging platforms or internet-based messaging service such as WhatsApp Messenger, electronically generated documents or receipts, emails etc are subject to stamp duty tax.

Banking Transactions

Section 89(3) of the FA requires all banks and financial institutions to charge stamp duties of N50 on certain transactions and remit the same to the FIRS. The Circular specifies that this charge applies to transactions of N10,000 and above on deposits and transfers. Additionally, banks are to pay stamp duties on eligible transactions including loan agreements, legal mortgage, guarantors’ forms, tenancy or lease and bonds.

Documents executed outside Nigeria

Another key highlight of the Circular is its clarification of the provision of the FA on the stamp duty charges for electronic documents executed outside Nigeria but received in Nigeria. In ascertaining the term “received”, the Circular posits that any document that has been executed outside Nigeria is received in Nigeria if it is i) retrieved or accessed in or from Nigeria, ii) stored on a device (including a computer, magnetic storage, etc.) and brought into Nigeria and iii) stored on a device in Nigeria.

Third Party Vendors

According to the Circular, corporate entities, ministries, departments, and agencies are required to charge and remit stamp duty tax on contracts with third party vendors. The charge, excluding Value Added Tax, is 1% of the contract value.

CONCLUSION

While the Circular is a forward thinking attempt to guide tax payers on the interpretation of the provisions of the FA, it raises serious questions on the feasibility of implementation, especially considering the fact that it imposes a duty on tax payers to voluntarily declare the stamp duty tax on electronic instruments. It also presupposes that the FIRS has the capacity to monitor all electronic instruments executed outside Nigeria and received in Nigeria.

FINTECH REGULATORY UPDATE – THE CENTRAL BANK OF NIGERIA REGULATORY SANDBOX

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On June 23, 2020 the Central Bank of Nigeria (CBN) released for review by stakeholders, a Draft Framework for Regulatory Sandbox Operations (the “Draft Framework”); aimed at  establishing a controlled environment where disruptive technology in the financial services can be tested under the supervision of the CBN.

The first regulatory sandbox in the world was formally established in 2015 by the United Kingdom Financial Conduct Authority (FCA) and was reported as successful with 90% of the companies that participated in the first cohort going on to market and 40% receiving investments. Since then many countries including Estonia, Indonesia, HongKong and states in the United States have established regulatory sandboxes.

The concept of a regulatory sandbox was borne from a need by regulators to not stifle Fintech innovation with unsuitable archaic Financial Services regulations. Accordingly, the regulatory sandboxes were geared towards enabling selected Fintechs test their products without formal licences; whilst the regulators are able to better understand the product and develop suitable regulations.

The Draft Framework is Nigerian government’s effort to encourage Fintech innovation whilst protecting consumer interests and is a welcome development. Below are highlights.

  1. Who is eligible to Participate in the Regulatory Sandbox? Financial Institutions already licensed by the CBN and all other companies looking to test innovative Fintech products.
  2. What kind of products will qualify? Products which are not already governed by existing regulations or prohibited by regulation. This means that products falling squarely within Mobile Money and Payment Service Bank regulations amongst other existing regulations would be unable to participate.
  3. How can a Fintech participate? Applicants are to apply through the CBN website once the CBN announces to the general public that it is taking applications. The admission process would be once a year.
  4. What is the admission criteria? Apart from documentary requirements such as corporate registration documents, applicants must show the usefulness and functionality of the product; and must have resources to support the testing.
  5. What would be the testing duration and product reach? The applicant is to advise on the duration required to test the product; the volume of consumers and the value of the product to be accessed during the testing period; subject to the CBN’s approval.
  6. What happens upon completion of the test? The Bank would decide whether to allow the product or solution to be introduced fully into the Nigerian market.
  7. Can the approval be revoked? At any time before the end of the testing period, the CBN retains the power to review and revoke the approval of any participant to partake in the Sandbox.

 

Conclusion

The sandbox is a step in the right direction by the CBN. The following points should however be considered in finalising the ‘Draft Framework.

  • The Draft Framework does not provide clear incentives for Fintechs to participate in the sandbox. For instance, will the grant of an approval or licence for the service be fast tracked for successful applicants?
  • The Draft Framework states that the Bank would advise innovators on how to align their products with existing laws and regulations. This should be clarified as it appears to defeat the concept of a regulatory sandbox which is for regulations to evolve to suit Fintech developments. For instance, the UK Financial Conduct Authority (FCA) provides for waivers or modifications of its rules to accommodate new technology.
  • It should be noted that other regulators such as the Securities and Exchange Commission and the Nigerian Communication Commission have indicated that they would establish regulatory sandboxes. The CBN should consider how an overlap between regulators would work. It would be tidier to have one regulator overseeing the regulatory sandbox for the Fintech space.