FINANCE COMPANIES (AMENDMENT) BILL

Order for Second Reading read.

3.35 p.m.

The Parliamentary Secretary to the Minister for Finance (Mr Tang See Chim): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Finance Companies Act, 1967, was passed by Parliament on 21st December, 1967, and was brought into operation on 10th January, 1968. The purpose of the Act is to safeguard the interests of the public who deposit funds with finance companies. Since the coming into operation of the Act, companies transacting financing business have been licensed and their operations subject to the supervision and control of the Commissioner for Finance Companies.

Members will recollect that during the Second Reading of the Finance Companies Bill in Parliament in December 1967, the Minister for Finance explained that it was necessary to pass the Bill without reference to Select Committee, so that proper control could be established immediately to check the future proliferation of finance companies. However, the Minister for Finance also indicated that every consideration would be given to representations from finance companies and, if necessary, amending legislation could later be proposed.

Since the coming into operation of the Act, the Finance Ministry has received representations from the Association of Finance Companies, the Finance House Association of Singapore and the Singapore Chinese Chamber of Commerce on certain provisions of the Act. After consideration of the views expressed and in the light of the experiences gained in the last two years or so in regulating and controlling the operations of the finance companies, it was felt that a comprehensive review of the Act need be carried out.

An Advisory Committee was then formed for this purpose. This Committee was chaired by the Commissioner for Finance Companies and included representatives from the two finance associations and the Chinese Chamber of Commerce as well as consultants from the International Monetary Fund. It considered various memoranda and proposals submitted to it and held discussions and consultations with the Solicitor-General, the Registrar of Companies and other Government departments concerned with the working of the Act.

As a result of its deliberations, it recommended certain amendments to the Act which are incorporated in the amendment Bill now before the House.

The Bill seeks to amend the Finance Companies Act, 1967, by introducing a number of unrelated amendments designed, in the main, to alleviate or relax the strictness of certain provisions in their application to the business activities of finance companies. In the task of protecting depositors' funds, it must be conceded that the profitability of finance companies should not be unduly crippled by the too restrictive provisions. The more important amendments are as follows.

Clause 2 amends section 2 of the Act on the definition of "financing business". This amendment extends the definition of "financing business" to include hire-purchase companies which accept deposits from the public. As now defined in the Act, "financing business" means, in summary, the carrying on of the dual function of borrowing money from, and lending money to, the public, but as hire-purchase financing by legal definition is not lending of money, these hire-purchase companies have so far not been brought within the ambit of the Act. Since it is the aim of the Act to protect depositors' funds, those companies which engage in hire-purchase financing, but do not accept deposits from the public, will still not be subject to the provisions of the Act.

[Mr Deputy Speaker in the Chair]

3.40 p.m.

The Parliamentary Secretary to the Minister for Finance (Mr Tang See Chim): Clause 4 adds a new section - section 3A - to the principal Act. This new section restricts the use of the term "finance company" or any of its derivatives indicating that a company transacts financing business. Henceforth, the use of the words "finance company" will be confined to only finance companies licensed under this Act in the same manner as the word "bank" is restricted to companies doing banking business. This is to avoid confusion and provide the means to the members of the public to distinguish a company which is licensed to carry on financing business from the great number of companies which are not so licensed, but whose business is akin to that of "financing business".

Clause 7 repeals section 12 of the principal Act and substitutes therefor a new section. The existing law provides that every finance company shall maintain a reserve fund and, before any dividend is declared, it shall annually transfer a certain percentage of net profits to reserve to strengthen the company. This restriction on payment of dividend to shareholders will now be relaxed, so that adequate profits may be left over for distribution to the shareholders to encourage equity participation in finance companies. On the other hand, it is felt that smaller finance companies should be encouraged to grow faster by building up their reserves at the higher rates.

The amendment, therefore, provides for different amounts to be transferred to reserve fund according to the paid-up capital of the finance companies. For this purpose, licensed finance companies are divided into two categories:

(a) companies whose paid-up capital and reserves are $2 million and above each - these are required to transfer to reserve fund at the lower rates;

(b) companies whose paid-up capital and reserves are less than $2 million each - these are required to transfer to reserve fund at higher rates.

Clause 10 amends section 17 and relaxes the restriction on unsecured loans by raising the limit for each unsecured loan from $1,000 at present to $5,000 so as to enable the finance company to have a certain amount of "clean" lending to those who are considered credit-worthy, but the aggregate of all unsecured loans should not exceed 10 per cent of the finance company's paid-up capital and reserves.

A new provision has been added imposing a ceiling on secured loans to any single borrower to not exceeding 60 per cent of the paid-up capital and reserves of the finance company, but, with the approval of the Commissioner, this limit of 60 per cent may be raised to 100 per cent of the paid-up capital and reserves. The introduction of this limit is to spread the risk of lending of the finance company, so that "all the eggs would not be put in one basket", so to speak, which may endanger the interests of depositors.

A finance company is prohibited from investing more than 25 per cent of its paid-up capital and reserves in any other undertakings. Clause 12 raises this limit to 50 per cent, provided the approval of the Commissioner is obtained. This serves to improve the capacity of finance companies as institutional investors or, alternatively, it will enable finance companies to participate in equities aimed at economic development.

The present law provides that no finance company is permitted to acquire any immovable property except for the purpose of conducting financing business. While it is recognised that channelling too large a proportion of depositors' funds to acquire immovable properties may be of adverse interest to the depositors, nonetheless the finance companies should not be totally prevented from direct investment in immovable properties which offer an assured and growing income and become increasingly popular. Clause 13, therefore, removes this restriction and allows a finance company to acquire immovable properties up to 25 per cent of its paid-up capital and reserves, and such other additional property as may be approved by the Commissioner.

Apart from the foregoing, the scope of the Act has been narrowed so that it will not apply to licensed pawnbrokers whose business is already subject to the control of the Pawnbrokers Ordinance. Conversely, licensed finance companies will be specifically exempted from the operation of the Moneylenders Ordinance.

Provisions are also incorporated to empower the Commissioner to compound offences and make regulations to control advertisements by finance companies. Other amendments are concerned with the inspection and investigation of finance companies or are mainly intended to improve the administration of the Act.

It is not unlikely that some finance companies will still express dissatisfaction over some of the provisions of the law in spite of the fact that they will have been relaxed. But certain minimum standards and norms must be observed. It is believed that this amendment Bill strikes the happy medium between the interests of shareholders in maximising profits and the protection of the depositors' funds. It is hoped that this Bill will further achieve the purpose for which the Act is intended, i.e., the protection of the depositors as well as the orderly expansion of finance companies.

Sir, I beg to move.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill.- [Mr Tang See Chim].

Bill considered in Committee; reported without amendment: read a Third time and passed.