REGULATORY UPDATE: REGISTRATION OF DIGITAL LENDING COMPANIES WITH THE FEDERAL COMPETITION AND CONSUMER PROTECTION COMMISSION

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By Aderonke Alex-Adedipe and Eustace Aroh

 

Introduction

In 2021, the National Information Development Technology Agency (“NITDA”) issued a fine of 10 Million Naira against Soko Lending Company (a digital lending company) after receiving over 40 petitions on the abuse of personal data by the lending company.[i] Due to the rising complaints about the abuse of customers’ rights, the NITDA consequently collaborated with the Federal Competition and Consumer Protection Commission (“FCCPC”) for the protection of the rights of Consumers. The FCCPC had since then (together with the Inter-agency Joint Regulatory and Enforcement Task Force[ii]) imposed and enforced several sanctions on digital lending companies for breach of consumer rights.

On August 18, 2022, the FCCPC issued the “Limited Interim Regulatory/Registration Framework and Guidelines for Digital Lending 2022” (the “Framework”) further to its enabling Act[iii], which would allow the FCCPC regulate the digital lending space.

Who does the Framework apply to?

The Framework was issued and aimed at any company intending to carry on the business of digital lending in Nigeria.

Potential Conflict with the BOFIA 2020

Upon review of the Framework, it would appear that the Framework seeks to apply to all digital lending companies irrespective of their enabling license. In view of provisions of the Bank and Other Financial Institution Act 2020 (“BOFIA”), however, the intention of the FCCPC to regulate institutions licensed by the Central Bank of Nigeria (“CBN”) conflicts with the provision of section 65 of the BOFIA. Specifically, section 65 restricts the Federal Competition and Consumer Protection Act 2019 (FCCPA)[iv] from applying to the services of banks and other financial institutions.

Provisions of the Framework

  1. The Framework requires digital lending companies to apply to the FCCPC for registration by completing the FCCPC Interim Digital Lending Guidelines Form 001. The FCCPC will further request for specific information on the lending business of the company such as:
  1. the name and contact address of the business in Nigeria;
  2. The identity and nationality of the promoters, directors, nominee directors, secretaries, and key officials;
  3. the source of funding including the nature of the instrument, identity, nationality and nature of business of the source;
  4. any affiliations the lending company has with any company whether in Nigeria or abroad including parent companies, subsidiaries, associate companies etc;
  5. the license authorizing the business;
  6. a list of its digital application used in its operation;
  7. the interest rate and applicable fees including the method of calculation.

 

  1. The Framework also requires lending companies to prepare and submit the following documents together with their application for registration.
  1. Incorporation documents.
  2. An organogram showing its key officers.
  3. Contact information of the staff authorised to accept correspondence.
  4. Service level agreement with its service providers relating to operations.
  5. Evidence of feedback and complaint mechanism.

 

  1. The lending company is expected to appoint a representative who will relate with the FCCPC and act on behalf of the company.

 

Conclusion

Whilst the Framework is an interim instrument, the intention is to ensure that all digital lending companies are governed by a single regulatory regime in view of consumers’ rights.

The Framework, however, does not provide clear rules for digital lending companies to comply with. It is expected that upon release of the final regulation, the rules of the FCCPC will be adequately spelt out and CBN licensed institutions will be exempted from the Framework.

[i] See the NITDA press release <https://nitda.gov.ng/nitda-collaborates-with-the-federal-competition-and-consumer-commission-fccpc-to-tackle-data-abuse-by-money-lending-operations/>

[ii] An inter-agency Joint Regulatory and Enforcement Task Force was formed constituting the FCCPC, NITDA, Independent Corrupt Practices Commission (ICPC) etc.

[iii] The Federal Competition and Consumer Protection Act 2019 (“FCCPA”)

[iv] The enabling law of FCCPC

OPERATION OF A CROWDFUNDING PLATFORM IN NIGERIA: REQUIREMENTS FOR REGISTRATION AS A CROWDFUND INTERMEDIARY IN NIGERIA

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

 

Introduction

On August 3, 2022, the Securities and Exchange Commission (“SEC”) issued a circular to the general public, cautioning them against making investments with or through crowdfunding platforms that are yet to be registered with SEC. This circular was issued further to the Rules on Crowdfunding released by SEC in January, 2021 (“Rules”) requiring all well-intending crowdfunding intermediaries to be registered with the commission by June 30, 2021.

To assist unregistered crowdfunding intermediaries in complying with the Rules, we have set out the requirements for registration with SEC.

1. What is a Crowdfunding Intermediary and a Crowdfunding Portal?

A crowdfunding intermediary is an entity that facilitates transactions involving the offer or sale of securities through a crowdfunding portal. A crowdfunding portal, on the other hand, is the website, portal or platform used to facilitate interactions between fundraisers and the investing public.

It is important to note that crowdfunding intermediaries do not include technology service providers, communication infrastructure operators or financial service providers whose services are merely required for the proper operation of the crowdfunding portal.

2. What Crowdfunding Intermediaries are required to be registered with SEC?

The Rules require crowdfunding intermediaries that facilitate interactions between fundraisers and the investing public in Nigeria for investment-based crowdfunding, to be registered with SEC.

Under the Rules, a crowdfunding intermediary would be deemed to be operating a crowdfunding platform in Nigeria where, the crowdfunding portal is operated in Nigeria; or where it targets Nigerian investors. A crowdfunding portal located outside Nigeria would be deemed to be targeting Nigerian investors where the crowdfunding intermediary promotes the crowdfunding portal in Nigeria.

3. What are the registration requirements for Crowdfunding Intermediaries?

Corporate entities that wish to be registered with SEC as crowdfunding intermediaries are required to submit an application (using the appropriate forms) to SEC in addition to: a) the incorporation documents of the applicant as issued by the Corporate Affairs Commission (CAC); b) the audited accounts of the applicant; c) the applicant’s profile; d) the operation manual and business plan of the applicant; e) information on the crowdfunding system to be adopted by the applicant; f) the proposed brand name of the crowdfunding portal including evidence of trademark registration; g) the domain names of any website through which the crowdfunding portal would be operated and applicable social media handles e.t.c.

4. What is the minimum share capital for entities carrying on business as crowdfunding intermediaries?

The Rules require entities that intend to conduct business as crowdfunding intermediaries to have a minimum paid-up share capital of N100,000,000 (One Hundred Million Naira) (approximately $237,626). The applicant is also to take up a Fidelity Insurance Bond covering at least 20% of the minimum paid-up capital as stipulated by SEC’s rules and regulations.

5.What are the criteria for the approval of an application to be registered as a crowdfunding intermediary?

In determining whether the applicant should be registered as a crowdfunding intermediary, SEC is required to be satisfied that:

a. the applicant will be able to operate a fair and transparent crowdfunding system;
b. the principal officers of the applicant are fit and proper persons;
c. the applicant has sufficient financial, human and other resources for the operation of a crowdfunding portal as may be prescribed by SEC from time to time; and
the rules of the applicant make satisfactory provisions for the protection of investors and public interest; management of conflicts; the regulation and supervision of its users e.t.c.

6.What activities are registered Crowdfunding intermediaries prohibited from undertaking?

Registered crowdfunding intermediaries are prohibited from:

a. providing financial assistance to investors to invest in a fundraising offer hosted on its portal or compensating any introducer for providing it with information on potential investors;
b. soliciting investments;
c. facilitating secondary trade for investment instruments issued under the platform; and
d. using any alternative website or social media portal other than the portal registered with SEC.

7. What is the penalty for failure to register with SEC?

The Rules provide that crowdfunding intermediaries that fail to comply with the provisions of the Rules will be liable to a fine of not less than N100,000 (one hundred thousand Naira only) (approximately  $236) and N5,000(five thousand naira) (approximately $12) for every day the violation continues.

We recommend that all crowdfunding intermediaries that are yet to be registered with SEC, commence registration as soon as possible to avoid issues with SEC.

REGULATORY UPDATE: THE REVISED GUIDELINES FOR THE OPERATION OF NON-INTEREST FINANCIAL INSTRUMENTS BY THE CENTRAL BANK OF NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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On June 9 2022, the Central Bank of Nigeria (“CBN”) issued the “Revised Guidelines For The Operation of Non-Interest Financial Institutions’ Instruments by the Central Bank of Nigeria” (the “Guidelines”) to enhance their operations, respond to developments in the banking sector, and to provide uniform rules for accessing non-interest financial instruments.

What are Non-Interest Instruments?

Non-Interest Instruments (“NIIs”) are interest-free financing facilities granted by the CBN to Non-Interest Financial Institutions (“NIFIs“) by way of an incentive to ensure that they maintain liquidity for granting non-interest loans.

Who can access Non-Interest Instruments?

They are available to NIFIs ie., Non-interest Banks (NIB) (e.g, Jaiz Bank, Lotus Bank and Taj Bank) and deposit money banks with non-interest banking window (e.g. Sterling Alternate Finance, Suntrust Bank). In addition,  a deposit money bank wishing to gain access to NIIs may apply to the CBN for access to the non-interest banking window.

What are the conditions for obtaining NIIs?

NIFIs are required to fulfil the following conditions;

  1. Appoint and authorize two dedicated representatives who shall be responsible for initiating and consummating transactions on the non-interest banking window.
  2. Initiate each transaction in the prescribed format including through emails, letters, Real-time Gross Settlement (RTGS) and Scripless Securities Settlement System (S4).
  3. Refer disputes arising from the operations of the Guidelines to the Director of the Financial Markets Department within the CBN.

 

Which NIIs are available under the Guidelines?

  1. CBN Safe Custody Account (“CSCA”)

The CSCA allows participants to deposit excess funds in their possession with the CBN, for a period of 3 or 7 days. The CBN may in return pay returns on the deposit to the participating institutions considering: (i) the prevailing monetary policy and liquidity conditions in the banking system; (ii) the deliberation and decisions of the Market Support Committee of the CBN; (iii) the size of the deposit; (iv) prevailing conventional banking conditions; and (v) alternative investment options.

2. CBN Non-interest Note (“CNIN”)

The CNIN is a financial paper issued by the CBN as evidence that an interest-free loan, which must be a minimum of N100 million, was issued by the participating institution to the CBN. The CNIN, then entitles the participating institution to subsequently obtain interest-free loans from the CBN within 12 months after the maturity of the initial interest-free loan to the CBN. The issuance of such interest free-loans by the CBN shall also be subject to liquidity needs of the participating bank.

3. CBN Non-Interest Asset-Backed Securities (“CNI-ABS”)

Typically, the CBN invests in Islamic financial certificates issued by multilateral financial institutions (Sukuk).  Subsequently, the CBN may auction a portion of its interest in the Sukuk to participating banks by way of a CNI-ABS. The duration of the CNI-ABS shall be based on the duration of the underlining asset (the asset under the Sukuk). The CBN shall thereafter, allocate earnings received on the securitized asset (the asset under the Sukuk) to the participating institutions based on their financial participation in the auction, (less its agency fee).[i]

The minimum investment into the CNI-ABS shall be 100 million Naira and shall be tradable in the money market and the secondary market.

4. The CBN Non-Interest Special Bills (“CNI-SB”)

The CNI-SB is issued by the CBN to a participating institution subject to an interest-free loan which the CBN must have obtained from the Cash Reserve Requirement Account of the participating institution. In this case, the participating institution is subsequently entitled to borrow 10% of the value of the loan previously issued by the participating bank for 1/3 of the tenure of the initial loan.

5. Intra-day Facility (“IDF”)

The IDF provides interest-free funds to the participating institution for 1 business day to avoid the gridlock on the settlement system.  The IDF shall be provided on the same day of request, and shall be secured by a collateral approved by the CBN and valued at 120% of the loan.

6. Funding for Liquidity Facility (“FfLF”)

The FfLF provides an overnight facility to participating institutions for short-term liquidity. The facility will be secured by a collateral and will be terminated by the next business day. A participating institution may convert an IDF to an FfLF, subject to rules of the CBN.

Conclusion

Non-interest banking was introduced in 2011 to grow the Nigerian financial system, encourage financial inclusion and provide alternative investment and financing options. The issuance of the Guidelines will encourage investments in the non-interest banking sector.

 

[i] The CBN also issued the Framework for the operationalization of the Central Bank of Nigeria Non-Interest Asset Backed Securities, which provides clarity on the operation of the CNI-ABS.

THE LAST MILE TO THE NIGERIAN STARTUP ACT

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By  Seun Timi-Koleolu and Karo Isiorho

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In our previous article, we introduced the Nigerian Startup Bill (the “Proposed Act”) and its objectives.  Since our last article, the Proposed Act has successfully progressed through the legislative houses and is now at its last mile to becoming an Act in Nigeria as it has now been submitted to the president for his assent.

 In this article, we have summarized key provisions of the Proposed Act to guide Startups upon its enactment. Some of these are highlighted below.

  1. Establishment of the National Council for Digital Innovation and Entrepreneurship

Upon enactment, a National Council for Digital Innovation and Entrepreneurship (the “Council”) is to be established. The Council shall comprise the president, some ministers and stakeholders. The functions of the Council will include: the formulation and provision of general policy guidelines; giving overall direction for the harmonization of laws and regulations that affect Startups; monitoring and evaluating the regulatory framework to encourage the development of Startups in Nigeria, etc.

In addition to the foregoing, the Proposed Act appoints the National Information Technology Development Agency (the “NITDA”) as an administrative department (the “Secretariat”) for the purpose of carrying out its operations. The NITDA is expected to: issue certificates to qualified Startups (“Startup Labelling”); maintain a directory of Startups, incubators, and accelerators; collaborate with the relevant ministries, departments, agencies and other stakeholders, amongst other duties.

  1. Startup Labelling

Upon enactment, NITDA will issue a certificate, known as a Startup Label to entities that meet the eligibility criteria. To be eligible, an entity is required to:

i. be registered as a limited liability company under the Companies and Allied Matters Act 2020, and must have  been in existence for a period not exceeding 10 years;

ii. have the objectives of innovation, development, production, improvement, and commercialization of a digital technology innovative product or process;

iii. be a holder or repository of a product or process of digital technology; or the owner or author of a registered software; and

iv. have at least one Nigerian as a founder or Co-founder, provided that the Nigerian founder or co-founder will share from profit or revenue from the sale of shares.

Upon the issuance of a certificate, a Startup shall be recognized as a “Labelled Startup” and can then enjoy the incentives set out in the Proposed Act. A Startup Label shall be valid for a period of 10 years from the date of issuance.

It is important to note that the provisions of the Proposed Act will not apply to holding companies or subsidiaries of existing companies that are not registered as a Startup. Hence, such companies might not be issued a Startup Label by the NITDA.

  1. Authorisation of a Startup Support and Engagement Portal (“SSEP”)

The Proposed Act provides for the creation of a portal (“SSEP”) authorized to enable Startups register with relevant regulators, ministries, departments, and agencies of government.  The SSEP will assist in bridging the gap between Startups and regulatory authorities.

The SSEP will also serve as an interactive platform for announcements and application of various incentives granted to Startups by the Nigerian government. The SSEP will be managed by the NITDA, who shall appoint an officer (“Coordinator”) on the approval of the Council. Some of the functions of the Coordinator are as follows:

  1. maintaining a register of Labelled Startups in Nigeria;
  2. keeping relevant documents and records of Labelled Startups;
  3. implementing the decisions of the Council on the labelling of a Startup, etc.
  1. Establishment of a Startup Seed Investment Fund

Upon the enactment of the Proposed Act, a Startup Seed Investment Fund will be set up and managed by the Nigerian Sovereign Investment Authority. The funds will be applied to provide early-stage financing and relief to Startups, technology laboratories, accelerators, incubators and hubs.

  1. Provision For Tax and Fiscal Incentives

Upon the enactment of the Proposed Act, Labelled Startups, their employees and investors are expected to benefit from tax and fiscal incentives including:

i. exemption from the payment of income tax or any other tax chargeable on the Labelled Startups’ income or revenue for a period of four years commencing from     the date of the issuance of the Startup Label;

ii. enjoyment of a 5% tax relief from income tax assessable on yearly profits. This incentive will apply to employees of Labelled Startups that have a minimum of ten employees, 60% of whom are without any form of work experience or graduated from school not later than 3 years;

iii. access to grants and loan facilities administered by the Central Bank of Nigeria, the Bank of Industry or other bodies statutorily empowered to assist small and medium-scale enterprises and entrepreneurs;

iv. access to export incentives and financial assistance, applicable to Labelled Startups involved in the exportation of products and services;

v. eligible employees shall be entitled to personal income tax exemption of 35% for a period of two years from the date of engagement by a Labelled Startup;

vi. exemption from payment of capital gains tax on gains that accrue from the disposal of assets by angel investors, venture capitalists, private equity fund, accelerators or incubators with respect to a Labelled Startup, etc.

  1. Obligations of a Startup Label

The Proposed Act prescribes obligations which Labelled Startups must comply with while conducting business in Nigeria. These include:

i. complying with all the extant laws governing businesses in Nigeria;

ii. providing information annually on the number of human resources, total assets     and the annual turnover achieved from the period the Startup Label was granted;

iii. maintaining proper books of account in accordance with reporting obligations provided under extant laws and regulations;

iv. providing an annual report on incentives received and advancement made by virtue of the incentives;

v. notifying the coordinator of any change in structure, composition or objects within a period of one month from the date of such change; and

vi. complying with obligations set out by the Coordinator after issuance of the Startup Label.

Where a Labelled Startup defaults in any of the obligations or fails to meet the eligibility criteria, the Coordinator shall notify the Startup of the default, and within 30 days of the notification, the Startup shall take steps to rectify the default. Failure to regularize the default upon being notified may amount to a withdrawal of the Startup Label.

Conclusion

As stated earlier, the Bill is at the last stage and awaits Presidential assent. Given that it was originally introduced by the President’s administration as part of its commitment to transform various sectors of the economy by leveraging on digital technologies, it is expected that the president will approve the Bill in good time. It is also worthy of note that the passing of a Bill may be delayed by a change in political administration.  However, where a President refuses to give his assent, the National assembly may overrule the veto of the President pursuant to the provisions of the Nigerian constitution and pass the Bill into law without the Presidential assent.