REGULATORY REQUIREMENTS FOR FINTECH IN NIGERIA; CBN LICENCES

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Seun Timi-Koleolu and Eustace Aroh

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Introduction

On December 9, 2020, the Central Bank of Nigeria (CBN) issued a circular, recategorizing Payments System licensing in Nigeria into four major categories: Switching and Processing; Mobile Money Operations; Payment Solution Services; and Regulatory Sandbox. There was, however, no unified document containing the requirements for each of these licensing categories. This made gathering information on the licenses cumbersome for potential license applicants. To resolve this issue, the CBN recently released a compendium containing all the requirements for Payment System licenses.

We have provided in this article, a snapshot of the CBN requirements and gone a step further by setting out the activities permissible under each licensing category.

  NAME OF LICENSE ACTIVITIES THE LICENSE PERMIT LICENSING REQUIREMENT FEE AND CAPITAL REQUIREMENT
 
1 Switching and Processing Licence

 

 Switching; card processing; transaction clearing; settlement agents; and all activities permitted for Payment Solution Services (in 3 below). ·Corporate documents;

·Tax Clearance Certificate (TCC) for 3 years (if applicable) and Taxpayers Identification Number (TIN) of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·Bank Verification Number (BVN), Curriculum Vitae (CV) and means of identification (ID) for the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan and product deployment methodology;

·Requisite policies and framework;

·Signed agreements with sub-agents, financial institutions and business parties; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
2 Mobile Money Operator Licence

 

 E-money issuing; mobile wallet creation and management; pool account management; and all activities permitted for Super-Agent (in 6 below). ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Business plan;

·Requisite policies and framework;

·Project deployment time; and

·Signed agreements with its partners.

 ·Application fee of N100,000;

·Payment of the refundable sum of N2 billion in escrow to CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
3 Payment Solution Services (PSS)

 

 It includes all the activities permitted for Payment Solution Service Providers (PSSP) (in 5 below); Payment Terminal Service Providers (PTSP) (in 4 below); and Super Agents (in 6 below).

 

Companies seeking to obtain the PSS license will have to select any one or combination of the following licenses: PSSP; PTSP; and Super-Agent.

 ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details and profile;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework;

·Signed agreements with its sub-agents, financial institutions, and partners;

·Minimum of 50 agents;

·Evidence of payment card security certification and other relevant payment terminal certification; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of up to 250 million (depending on which of the licenses the company wishes to obtain) in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
4 Payment Terminal Service Provider (PTSP) Licence

 

 POS Terminal deployment and services and POS terminal ownership. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Requisite policies and framework; and

·Project deployment methodology.

 ·Application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1,000,000 to be paid before the issuance of the final licence.
5 Payment Solution Service Provider (PSSP) Licence

 

 Payment processing gateway; payment solution development; and merchant service aggregation and collection. ·Corporate documents;

·Tax Clearance Certificate (TCC) of three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of directors and top management (including one non-executive director, chairman, managing director);

·Signed agreements with its partners;

·Requisite policies and framework; and

·Evidence of payment card security certification and other relevant payment terminal certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N100 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
6 Super-Agent Licence Conducting certain banking activities such as cash deposit and withdrawal; bill payments; local fund transfer; balance enquiry etc. ·Corporate documents;

·TCC for three years (if applicable) and TIN of the company;

·Details of ownership and holding company structure (if applicable);

·Company details, profile and business plan;

·BVN, CV and means of ID of the directors and top management (including one independent non-executive director, chairman and managing director);

·Minimum of 50 agents;

·Reference letter from a financial institution and signed agreement with the sub-agents, financial institution, and business partners;

·Must have existed for over 12 months;

·Requisite policies and framework; and

·Payment Terminal Service Aggregator of Payment Terminal Application Certification.

 ·Non-refundable application fee of N100,000;

·Payment of the refundable sum of N50 million in escrow to the CBN; and

·Licensing fee of N1 million to be paid before the issuance of the final licence.
7 Regulatory Sand Box As may be determined in the Sandbox.

 

The regulatory Sandbox is aimed at stimulating innovation and deepening financial inclusion. To this end, the CBN will review the products during the implementation.1

 ·Corporate documents including shareholding structure;

·Company details and profile;

·Project plan, business proposal and outline of the strategy of the sandbox trial;

·Evidence of patent rights (if applicable);

·CV of directors and top management; and

·Requisite policies and framework.

 Not applicable.

 

PROPOSED REGULATION OF DIGITAL (ROBO) ADVISORY SERVICES IN NIGERIA

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

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INTRODUCTION

As Lord Denning once said; “If we never do anything which has not been done before, we shall never get anywhere. The law will stand still while the rest of the world goes on, and that will be bad for both”.

On May 5, 2021, The Securities and Exchange Commission (SEC) published its “Proposed New Rules on Robo-Advisory Services1 (the “Rules”), which signifies the progression of certain aspects of the Nigerian legal framework on financial advisory services. In recent times, the extension of technology to money management in the form of “Fully Automated Robo-Advisers,”2  presents an option to an investor willing to take advantage of automated digital investment advisory technology, for discretionary online algorithmic-based financial advice.

This newsletter examines in summary, some key provisions of the Rules and what they mean for the financial business community.

KEY PROVISIONS

Scope: The Rules seek to apply to all capital market operators as well as individuals or corporate bodies, interested in providing “Digital (Robo) Advisory Services”. The Rules also require that all interested individuals and companies shall be subject to registration by the SEC. This is in line with international best practices on investor protection. For example, in the U.S., Robo-Advisers must register with the U.S. Securities and Exchange Commission just like human advisers and are subject to the same securities laws and regulations as traditional broker-dealers.3

Definitions: The Rules offer three (3) definitions, and in essence categorisations of Robo-Advisory services. These are – “Fully Automated Robo-Advisers,” (“Robo-Advisers with no human adviser interaction in the advisory process.”) “Digital Advisory Services” (“the provision of advice on investment products using automate, algorithm-based tools which are client-facing, with little or no human adviser interaction…”) and “Robo-Adviser” (“a person who provides digital advisory services”). Although Robo-Advisory technology exists, there are varying degrees of human interface and influence on the functionalities of this novel technology. This appears to be the rationale for SEC’s decision to seek to hold humans accountable in the deployment of algorithm/artificial intelligence-based financial advisory services.

Additional Regulatory Requirements: The Rules mandate strict compliance by Robo-Advisers to all ‘business conduct requirements’ in the Investment and Securities Act 20074. Robo-Advisers are also instructed to carry out due diligence5 on all third-party providers to assess risks associated with such outsourcing arrangements.6  In addition, Robo-Advisers are to adhere strictly to client’s orders7  and Robo-Advisers intending to perform portfolio management functions are required to comply strictly with the rules and regulations governing Fund/Portfolio Management Functions.8

Rebalancing of Client Investment Asset Allocation: The procedure for digital advisory services which involves requesting a set of information regarding the risk appetite and preferred portfolio of the investor, is described under the Rules. Upon providing the requested data, the Robo-Adviser provides the best investment option, which is algorithm-based. The client may accept or reject the advice. Where the client, however, chooses to act on the previously rejected advice, the Rules refer to this as “Rebalancing”. The Rules mandate Robo-Advisers to seek the express consent of an investor when presented with a revised portfolio after rejecting a previously recommended one. 9

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance.  Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Developing the Client-Facing Tool: Robo Advisers are required to ensure that the technology utilized is programmed to carry out tasks to a premium standard. This includes the collection of information, analyses, and recommendations given by algorithm-driven advisor tools. Robo-Advisers are mandated to identify inconsistent responses from clients, identify and eliminate clients who are unsuitable for investing10 and also ensure that algorithms can detect bias, assign risk profiles correctly and consistently, and produce the intended asset allocation and investment recommendation.

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance. Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Information on Algorithms: Another innovative inclusion in the Rules is the requirement for Robo-Advisers to disclose in writing, to their clients, all assumptions, limitations, and risks associated with the algorithms, circumstances where Robo-Advisers may override algorithms or halt services, and material adjustments to the algorithms.

CONCLUSION

Robo-Advisers have the potential to offer investors speedy and cost-effective access to investment advisory services. However, the fiduciary nature of this role demands prompt oversight. The provisions highlighted above, reveal that investor protection is at the heart of the Rules.  Whilst implementing rules against an algorithm may seem impossible, ensuring that persons behind such algorithms are responsible for ensuring their efficient operation can be achieved. Therefore, the proposed monitoring of these innovations and future implementation of safeguards is a necessary step for the protection of investors in Nigeria.

 

  1. SEC NIGERIA, ‘Proposed New Rules and Sundry Amendments To The Rules And Regulations Of The Commission’ (2021) < https://sec.gov.ng/proposed-new-rules-and-sundry-amendments-to-the-rules-and-regulations-of-the-commission/> Accessed 19 May 2021
  2. Section 1 of the proposed Robo-Advisory Rule defines this to mean Robo Advisers with no human intervention
  3. CFA Institute, ‘Robo-Advisors’ (2021)< https://www.cfainstitute.org/en/advocacy/issues/automated-advisors> Accessed 19 May 2021
  4. Section 3 (i) of the Proposed New Rules on Robo-Advisor Services
  5. Section 3 (iii) of the proposed New Rules on Robo-Advisor Services
  6. Section 3 (ii) of the proposed Robo-Advisory Rule provides that third-party providers to whom development and maintenance of client-facing tools have been outsourced to by a Robo Advisor are required not to be registered by the commission.1. https://www.companybug.com/what-is-share-capital/
  7. Section 27(2) of the Companies and Allied Matters Act, 1990.
  8. Section 27(2) of the Companies and Allied Matters Act, 2020.
  9. Paragraph 13 of the Companies Regulations, 2021
  10. Section 130 of the Companies and Allied Matters Act, 2020.

THE REGULATORY PROCEDURE FOR IMPORTATION OF GOODS INTO NIGERIA

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By Seun-Timi-Koleolu and Feyijuwa Akinyanmi

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Importation forms a key part of the Nigerian economy as statistics show that over US$53 billion worth of goods were imported from around the globe into the country in the year 2020[1]. To cater for the high demand for imported goods in the country, the Nigerian Customs Service (NCS) in collaboration with other government agencies has put in place procedures for importing goods into the country.
In our previous article, we outlined the process for acquiring a Standards Organisation of Nigeria Conformity Assessment Program (SONCAP) certificate in line with the procedure for importing goods into the country. Today’s article will briefly highlight the steps for importing goods into Nigeria.

  1. Confirm that the goods can be imported into Nigeria.

A company wishing to import goods into Nigeria must first check the Import Prohibition List published by the NCS[2] to ensure the goods to be imported are not prohibited or restricted. The rationale for the list is to improve the local economy by reducing reliance on imported goods and to control the inflow and outflow of foreign exchange. Some of the items on the prohibition list include frozen poultry, bagged cement, paracetamol tablets, soaps and detergent, telephone re-charge cards and vouchers etc.

  1. Register the TIN with the FIRS as an Importer

Upon registration of the company to be used for the importation (Importing Company), the company will be issued a certificate of incorporation and a Tax Identification Number (TIN). The Importing Company is required to register its TIN with the Federal Inland Revenue Service (FIRS) by submitting the TIN and a valid email address on the Single window for trade portal (“Trade Portal”).

  1. Obtain a Product Certificate (PC)

The PC is issued by the Standards Organisation of Nigeria (SON)  to the exporter of the goods through firms accredited by it (“Accredited Firms”) e.g Cotecna, SGS etc. The PC certifies that the quality of the goods to be imported are in compliance with the standards set out by the SON. The exporter is required to share the PC with the Importing Company who will then activate the PC on the SON website[3], where it will be sent to the NCS and uploaded on the Trade Portal.

  1. Obtaining and submitting of e-Form M

The e-Form M can be obtained from the Trade Portal or an authorized dealer bank and submitted for approval online to the authorised dealer bank with the required supporting documents. The supporting documents must be marked “valid for forex” or “not valid for forex” where applicable. The Importing Company is required to refer to the Central Bank of Nigeria’s circular on the list of goods not valid for foreign exchange[4] to determine if the goods to be imported are valid for forex. Examples of such goods include furniture, toothpick, kitchen utensils, sardines, textiles etc. Please note that the importation of these goods are not banned as the Importing Company will just be required to import the above goods without access to the official Nigerian Foreign Exchange Market. Where the goods are not valid for forex, the Importing Company will be required to write a letter to the authorized dealer bank stating and providing evidence showing the source of the foreign exchange for the payment of the goods. Upon approval, the authorised dealer bank will forward the e-Form M and the supporting documents to the NCS for registration on the Trade Portal upon conducting a preliminary review of the documents submitted.

  1. Obtaining SONCAP Certificate (the “Certificate”) and other regulatory permits

The Certificate is issued by the SON upon inspection of the goods to be imported by any of the Accredited Firms. The company needs to submit the required documents and its e-Form M for the SONCAP certification process. Once the Certificate is issued, the Importing Company is to activate it on the SON website after which it will be sent to the NCS and uploaded on the SON Certificate database on the Trade Portal. Depending on the type of goods to be imported, the Importing Company may be required to obtain the appropriate permit from various regulatory bodies such as the Department of Petroleum Resources (DPR) or the National Agency for Food and Drug Administration and Control (NAFDAC).

  1. Pre-arrival Assessment Report (PAAR) Process

A valid PAAR approved by NCS is required to clear imported goods. The company is required to send its final documents including the final invoice; Certificate of Origin (CoO); transport documents; Packing list; e-Form M; and PC to the authorized dealer bank who will then complete an electronic PAAR Consignment form and will submit it together with the final documents to the NCS via the Trade Portal. Upon approval by the NCS, the PAAR will be generated.

  1. Clearance of the goods by the NCS and Payment of Import Duties

To clear the goods upon arrival to Nigeria, the Importing Company is required to prepare and upload a Single Goods Declaration (SGD) alongside the final documents and PAAR to the Trade Portal. The SGD shows the details of the imported goods and can be obtained through the Trade Portal. The Importing Company is also required to pay import duty on the goods which will be determined by the tariff published by the NCS[5]. The  Importing Company pays the import duties by selecting the assessment option on the NCS page of the Trade Portal. The details of the imported charges will be sent to the designated duty collection bank. A signed receipt will be issued to the Importing Company and an e-confirmation to the NCS acknowledging payment of the duties and taxes.

  1. Request release of goods

After payment of all charges by the Importing Company, a request may be made for the release of the goods. Upon scrutiny of the goods, they will be deemed clear and an exit note will be issued by the Terminal Operator.

 

Conclusion

It is important to note that companies may choose to outsource the importation process to a logistics company who will handle the importation of their goods on their behalf. Suitable contractual terms would have to be entered into with the logistics company to protect the interest of the Importing Company.

[1] https://www.worldstopexports.com/nigerias-top-10-imports/

[2] https://customs.gov.ng/?page_id=3075

[3] https://soncap.son.gov.ng/certificateActivation/webform

[4] https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf

[5] https://trade.gov.ng/tariff/search.do

 

CBN REGULATORY OVERSIGHT; APPOINTMENT AND REMOVAL OF DIRECTORS OF FINANCIAL INSTITUTIONS UNDER NIGERIAN LAW

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By Aderonke Alex-Adedipe and Eustace Aroh

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Introduction

On April 29, 2021, the Central Bank of Nigeria (CBN), as the apex regulator of all banks and other financial institutions in Nigeria, announced the removal of all the directors of First Bank Limited, a licensed commercial bank and financial services company, and FBN Holdings PLC, its holding company. The CBN also went a step further to appoint a new board of directors for the two companies.

In this article, we analyse the regulatory powers of the CBN to make decisions in relation to the constitution of the board of directors of financial institutions in Nigeria.

 

Provisions of the Companies and Allied Matters Act 2020[i]

The affairs of companies, including financial institutions, are generally guided by the provisions of the Companies and Allied Matters Act 2020 (“CAMA 2020”) which also provides for the general procedure for the appointment and removal of directors of a company.

Appointment – The first directors of a company are appointed by the subscribers during incorporation[ii] and subsequent directors are appointed at the annual general meeting by the shareholders.[iii] Where a vacancy is created by death, removal, retirement or resignation, a replacement director may be appointed by the board of directors to fill the vacancy until the next annual general meeting.[iv]

Removal – For a director to be removed under the CAMA 2020, a meeting of the shareholders must be convened and a decision to remove the shareholder passed at the meeting.[v] Prior to the meeting, the shareholder proposing the removal of the director is required to send a special notice to the company. The company will, in turn, send the special notice to the director proposed to be removed who will, if he wishes, make his representation in writing. The Company shall send the representation of the director alongside the notice of the meeting to all shareholders.[vi]

 

Provisions of the Bank and Other Financial Institution Act 2020

In addition to the CAMA 2020, banks and other financial services companies are also regulated by the Central Bank of Nigeria Act 2007 (CBN Act), Bank and Other Financial Institution Act 2020 (“BOFIA”) and the CBN’s various codes of corporate governance.

Under the BOFIA, before a company can carry on the business of banking, it must be licensed by the CBN.[vii] The CBN which was created under the CBN Act with the task of promoting a sound financial system in Nigeria[viii] was also granted regulatory powers under the BOFIA over all Nigerian banks. Sequel to its regulatory powers, banks are not to enter into any arrangement that will change the control (which includes appointment and removal of directors) or significant shareholding of the bank without seeking the prior written consent of the CBN.[ix]

 

Powers of the CBN to appoint and remove Directors

The powers of the CBN to remove and appoint a director can be deduced from the combined reading of sections 33 and 34(1)(2) of the BOFIA. Essentially, the CBN, under section 33, has the power to investigate the affairs of a bank where:

  • a director, shareholder, creditor or depositor applies to the CBN;
  • the bank is carrying on business in a way that is detrimental to the interest of the depositors or creditors;
  • the bank does not have sufficient assets to cover its liabilities to the public;
  • the bank has contravened any provision of the BOFIA or a relevant law; or
  • where it is in the interest of the public to do so.

Based on the investigations conducted under section 33, if the CBN is satisfied that the bank is liable in respect of the issue it was investigated for[x], the CBN may exercise the powers conferred on it under section 34(2) which includes the power to (notwithstanding any law or the memorandum and articles of the bank) remove a director and appoint any person in his stead and stipulate the amount to be paid to that director as remuneration.[xi]

 

Other Financial Institutions

Under the BOFIA, “other financial institution” refer to individuals, groups or companies that engage in the business of discount houses, bureau de change, finance company, money brokerage, foreign exchange purchase, international money transfer services, mortgage refinance or guarantee company, finance holding company or payment service providers, factoring, project financing, debt administration, equipment leasing, fund and investment management, private ledger services, and local purchases order financing.[xii]

Under the BOFIA, where the CBN is satisfied that a company classified as an “other financial institution” is in “a grave situation”, the CBN may exercise the powers granted to it under section 34, including the power to remove and appoint a director.[xiii]

 

Conclusion

The powers of the CBN to appoint and remove directors in a financial services company have been tested at the Court of Appeal[xiv] where it was held that the power of the CBN to remove and appoint directors was legal in line with sections 33 and 34 of BOFIA.[xv] Financial institutions must note that, notwithstanding their powers to remove and appoint directors at their discretion, its decision is subject to the regulatory oversight of the CBN.

 

[i] See our article on “Nigerian Companies and Allied Matters Act 2020 – Does The Removal of a Director Result in His or Her Disqualification as a Director of Other Companies?” https://pavestoneslegal.com/nigerian-companies-and-allied-matters-act-2020-does-the-removal-of-a-director-result-in-his-or-her-disqualification-as-a-director-in-other-companies/

[ii] Section 272 CAMA 2020

[iii] Section 273 (1) CAMA 2020

[iv] Section 274(1) CAMA 2020

[v] Section 288(1) CAMA 2020

[vi] Sections 288(2)(3) CAMA 2020

[vii] Section 2(1) BOFIA

[viii] Sections 1 and 2 CBN Act.

[ix] Section 7 BOFIA. CBN’s Revised Assessment Criteria For Approved Persons’ Regime For Financial Institutions

[x] Section 34(1)(d) BOFIA

[xi] Section 34(2)(f) BOFIA

[xii] Section 131 BOFIA

[xiii] Section 62 (1) BOFIA

[xiv] Danson Izedonmwen & Anor v. Union Bank PLC & Anor (2011) LCN/4919 (CA); appeal no: CA/L/1205/10 delivered by John Inyang Okoro, J.C.A on the 21st day of November, 2011

[xv] Then 33 and 35 of the BOFIA 1990.