I. General Overview
"Savings finance activities " are defined as saving money for a certain period of time for the acquisition of residential or business property or vehicles, providing financing to clients for this purpose and managing the accumulated savings according to principles of interest-free financing and subject to the realization of conditions precedent under a contract. The fundamental feature that distinguishes this activity from other financing models is that the right to obtain the financing is subject to having accumulated savings for a period of time. In this financing model, while some of the clients are saving money, the others are receiving financing; thereby in effect the clients finance each other.
As this model had been gaining excessive use in practice, Turkish regulators published the Law No. 7292 on Amending the Law on Financial Leasing, Factoring and Financing Companies and Certain Laws ("Law No. 7292") on March 7, 2021 to regulate the savings finance system, supervise companies engaging in savings finance activities and to protect the rights and interests of the clients participating thereunder. The Law No. 7292 also changed the name of the relevant law on this matter to Law No. 6361 on Financial Leasing, Factoring, Financing and Savings Finance Companies ("Law No. 6361").
In this article, we will take a look into the significant provisions that this amendment has introduced to the Law No. 6361 in relation to the savings finance system.
II. Establishment Procedure
The Law No. 6361 requires companies which plan to engage in savings finance activities to obtain permission from the Banking Regulation and Supervision Authority ("BRSA") in order to be incorporated and initiate their activities.
Furthermore, the Law No. 6361 stipulates certain requirements with respect to corporate finance and structure of the savings finance companies. For instance, companies engaging in savings finance activities must be incorporated as joint-stock companies, with a share capital amount of at least TRY 100 million, and include the phrase "Savings Finance Company" in their titles; their shares must be issued as registered shares; their founders must have certain qualifications such as having financial strength, not being charged with imprisonment for specific crimes etc., and articles of association of the savings finance companies must be in line with the provisions of the Law No. 6361.
III. Scope of Activities and Restrictions
The Law No. 6361 regulates the permitted activities of savings finance companies in detail. Accordingly, they are obliged to arrange separate saving plans for each client and client group.
The Law No. 6361 obliges savings finance companies to segregate their savings fund accounts from their other accounts. In order to protect the clients' rights and interests, savings finance companies are prohibited from using the savings funds for any purpose other than fulfilling the liabilities arising from the savings finance agreements. In addition, savings funds cannot be withheld under a right of retention; made subject to a transfer, assignment or exchange of receivables; pledged or put up as collateral. Furthermore, these funds cannot be subject to an attachment, injunction, lien or included in the bankruptcy process, with the exception of clients' receivables arising from savings finance agreements. The Law No. 6361 also requires savings finance companies to engage in activities in line with interest-free financing principles.
Similar to other financing companies (i.e., the financial leasing companies, factoring companies, and financing companies) savings finance companies cannot engage in any activity other than the core business.
The Law No. 6361 prohibits savings finance companies from financing any debts unless the debt arises from the acquisition of residential or business properties, or vehicles. Savings finance companies are also banned from providing financing (except for those under the savings finance agreements), lending to third parties, and acquiring shares of other companies. It is worth mentioning that savings finance companies are not allowed to finance the acquisitions of residential and business properties or vehicles which are registered abroad.
IV. Savings Finance Agreement
The savings finance agreement is a new type of agreement that the Law No. 6361 has brought to the financial markets. The agreement obliges the savings finance companies to manage their clients` accumulated savings, to repay these funds. to provide financing, and also enables them to request an organization fee from their clients.
The execution of savings finance agreements is regulated in a similar way as other financing agreements. The Law No. 6361 also regulates clients' rights of withdrawal and termination in detail. The right of withdrawal may be exercised within 14 days following the execution of the agreement without any reason or paying any penalty, and the clients may terminate their savings finance agreements until the end of their savings period.
V. Significant Precautions
BRSA is allowed to make the necessary arrangements and to take all kinds of measures about savings finance companies by setting certain limits and standard ratios, in order to identify, monitor, measure and evaluate risks. The savings finance companies are obliged to comply with these limits and ratios that may be set as per the law, and to notify the BRSA immediately in case they reach or exceed the thresholds of such limits and ratios.
The BRSA is authorized to request savings finance companies to take the necessary measures within a period it deems appropriate and subject to a plan it approves, and to postpone the allocation dates for savings finance companies, if:
(i) Total value of their liabilities exceeds the total value of their assets, or their assets are in danger of not meeting their liabilities by maturity, or the asset quality deteriorates in a way that may weaken the financial structure;
(ii) Their equity funds are not sufficient to carry out their activities safely, due to the deterioration of the balance between income and expenses;
(iii) Requirements related to internal control, accounting, information processing, reporting systems are not complied with or there is an issue preventing the audit;
(iv) Their equities drop to one third of their paid-in share capital;
(v) They fail to establish an adequate and effective risk management system for measuring and managing exposed risks;
(vi) They pose a risk to the financial system in terms of trust or stability;
(vii) They adopt decisions and carry out transactions and implementations in breach of the Law No. 6361 as well as the relevant regulations and decisions of the BRSA.
The Law No. 6361 obliges the savings finance companies to set aside five per thousand of the organization fees they collect, from their income accounts, for payments to be made to savings owners in case of liquidation. The BRSA is authorized to increase this ratio up to three times on company basis and to determine the procedures and principles for its implementation.
The Law No. 6361 regulates a specific liquidation process to be applied to savings finance companies. In this regard, the BRSA is authorized to revoke the operating licenses or decide to liquidate the savings finance companies, if certain financial risks are identified and the relevant company fails to take the measures as required by the BRSA, or if the measures are not deemed sufficient.
Failure to comply with the provisions related to the savings finance agreements and savings finance activities are subject to certain administrative fines. Additionally, a penalty of imprisonment between six months and two years, and a judicial fine shall be imposed on those who violate the provisions related to the withdrawal from and termination of savings finance agreements.
The Law No. 6361 provides imprisonment between two and five years for the persons who engage in savings finance activities without being duly authorized, as well as a judicial fine. Security precautions (such as confiscation of property, confiscation of gains and revocation of licenses and permits) are imposed on legal entities that benefit from the crime. Also, the workplaces where unlicensed savings finance activities are carried out may be closed down temporarily or permanently (if unlicensed activities are continued despite the temporary closure).
The Law No. 6361 allows BRSA to apply to the courts to obtain a temporary injunction to suspend the activities and advertisements of businesses carrying out savings finance activities without being authorized. The injunction measures continue until they are lifted by the court's decision. In the event that these violations occur on the internet, the BRSA may decide to remove the content and/or block access to such websites. Additionally, Law No. 6361 also authorizes the BRSA to order the liquidation of savings finance companies operating without permission.
In recent years, the savings finance model had been increasingly used in Turkey to purchase houses and vehicles, which grabbed the BRSA`s particular attention. Consequently, the Turkish regulators have introduced significant provisions related to the savings finance system in order to supervise companies already engaging in these activities, in order to protect the rights and interests of the clients.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in June 2021. A link to the full Legal Insight Quarterly may be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.