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Regulation on hire purchase and financial leasing of cars or motorcycles: New Measures from the Bank of Thailand

NO&T Asia Legal Review

*Please note that this newsletter is for informational purposes only and does not constitute legal advice. In addition, it is based on information as of its date of publication and does not reflect information after such date. In particular, please also note that preliminary reports in this newsletter may differ from current interpretations and practice depending on the nature of the report.

I. Background

“Hire purchase” and “financial leasing” of cars or motorcycles (collectively “Auto Hire Purchase and Leasing”) are common means to provide loans for consumers to purchase vehicles in Thailand. According to the statistic provided by the Bank of Thailand (the “BOT”), as of the end of 2021, unpaid debts from Auto Hire Purchase and Leasing reached the amount of 1.8 trillion THB which constituted 12.4% of overall household debt of the nation. Moreover, 1 in 3 of Auto Hire Purchase and Leasing loans are provided through non-bank financial service providers. However, despite the prevalence of Auto Hire Purchase and Leasing in Thailand, the operation of Auto Hire Purchase and Leasing business is largely left unregulated, except for the regulation under the Consumer Protection Board which concerns only the restriction of unfair clauses in Auto Hire Purchase and Leasing agreements executed with consumers.

Given the lack of regulation of Auto Hire Purchase and Leasing business, the BOT, in cooperation with the Fiscal Policy Office under the Ministry of Finance, has initiated the drafting of the Royal Decree which will impose duties and restriction upon the business operators of Auto Hire Purchase and Leasing (the “Draft Royal Decree”). The Draft Royal Decree is enacted by virtue of Section 5 of Financial Institution Business Act B.E. 2551 (2008) (the “Financial Institution Act”) which gives power to the BOT to propose a Royal Decree to designate any unregulated financial service that affects the economy as a service which shall be under the regulation of the Financial Institutions Act. In this regard, the main objectives of the Draft Royal Decree are to maintain stability of financial economics, control the amount of insolvency in household debt, as well as provide protective measures to general consumers.

II. Key Takeaways from the Draft Royal Decree

Once enacted, the Draft Royal Decree will impose legal duties and restrictions on the business operators of Auto Hire Purchase and Leasing. The key takeaways based on the Draft Royal Decree published by the BOT are as follows:

(i) Definition of Auto Hire Purchase and Leasing

Under Section 3 of the Draft Royal Decree, “hire purchase” and “financial leasinge” of cars or motorcycles which will be subjected to the regulation under the Draft Royal Decree are defined as follows:

  • Hire purchase”: The definition refers to Section 572 of the Civil and Commercial Code of Thailand (the “CCC”) and specially limited to hire purchase and financial leasing of cars or motorcycles, meaning, “a contract whereby an owner of a car or motorcycle lets such car or motorcycle on hire and promises to sell to the lessee, or transfer the right therein to the lessee, on the condition that the lessee shall make certain rounds of payments.”
  • Financial leasing”: The definition refers to the stipulation under BOT’s notification concerning financial leasing service provided by commercial banks, meaning “renting a car or motorcycle under a financial lease contract, where a lessor procures a car or motorcycle according to the lessee’s bidding from a producer, distributor, or other party, or a car or motorcycle repossessed from another lessee in order to allow the lessee to utilize such car or motorcycle. The lessee is obligated to maintain and repair the leased asset. However, the lessee cannot terminate the contract unilaterally before maturity. Upon the expiration of the contract, the right to purchase the leased car or motorcycle is subjected to an agreement between the lessor and lessee”.

(ii) Scope of “Business Operators”

Under the definition in Section 3 of the Draft Royal Decree, business operators of Auto Hire Purchase and Leasing (“Business Operators”) which shall be subjected to the regulation under the Draft Royal Decree shall mean any Business Operator who provides Auto Hire Purchase and Leasing as an ordinary course of business, but shall not include, (i) financial institutions under the Financial Institution Act, (ii) Business Operators which are already regulated by specific regulators and laws, e.g., taxi cooperatives which are already under the supervision of Ministry of Agriculture and Cooperatives, and (iii) Business Operators who are natural persons.

(iii) Duties for Business Operators

It is noteworthy that the Draft Royal Decree does not require the Business Operators to obtain business license from the BOT in order to provide Auto Hire Purchase and Leasing but rather requires them to comply with duties under the Draft Royal Decree and sub-regulations which will be subsequently announced by the BOT (the “Compliance Duties”). Certain Compliance Duties may apply especially to the Business Operators of particular sizes or characteristics depending on the designation by the BOT. The examples of Compliance Duties under the Draft Royal Decree are as follows:

  • The Business Operators shall publicly announce information regarding interest rate, discount rate and any service fees at its place of business and shall report such matters to the BOT in accordance with the criteria as will be designated by the BOT under Section 7 of the Draft Royal Decree. Additionally, the method and details for calculation of annual service fees must also be notified to the customers under Section 9 of the Draft Royal Decree.
  • The Business Operators shall comply with the regulations in various matters which may be announced by the BOT by the virtue of Section 8 of the Draft Royal Decree i.e., (i) details of contract clauses under Auto Hire Purchase and Leasing agreements, (ii) maximum amount of debt guarantee in case a natural person becomes a guarantor to the Auto Hire Purchase and Leasing transaction, as well as, prohibition of unlimited amount guarantee, (iii) specific duties in case the Auto Hire Purchase and Leasing agreements grant the right to the Business Operators to amend the said agreements by themselves, (iv) disclosure of the Business Operators’ information, and (v) other operations relating to the business of Auto Hire Purchase and Leasing.
  • The Business Operators shall comply with the rate of interest, discount, service fees, deposit, guarantee, penalties, and benefits from the transaction as may be announced by the BOT under Section 11 of the Draft Royal Decree.

In addition to the Compliance Duties for Business Operators mentioned above, the Business Operators shall also have the duties to periodically report their business operations to the BOT, maintain record of financial accounts, documents, seal, or other evidence, as well as cooperate with the officer assigned by the BOT in case there is any request to give statement, inspection of corporate document or places of business, etc.

(iv) Penalties

Any Business Operator who fails to comply with the duties stipulated under the Draft Royal Decree shall be punishable with a fine penalty depending on the violation, for example, a Business Operator who fails to comply with the Compliance Duties stipulated by the BOT under the Draft Royal Decree shall be subjected to a fine not exceeding 500,000 THB and daily fine in the amount of 5,000 THB until the violation has been rectified. Directors, manager, or any authorized person of the Business Operators can also be subjected to the same penalty under Section 139 of the Financial Institutions Act i.e., imprisonment for a term not exceeding 1 year or a fine of 500,000 THB to 1,000,000 THB or both if such person gives any order or engages in any action which leads the Business Operator to commit certain violations under the Draft Royal Decree, for example, failure to keep an accurate record of financial accounts under Section 13, or failure to comply with the instruction given by the BOT under Section 21 to rectify any business practice which might be harmful to the public.

III. Conclusion & further development

According to news report which cited the information from the meeting between the BOT and Thai Hire-Purchase Business Association, it can be expected that the Draft Royal Decree may be enacted by November 2023, and it will be effective at the expiry of 180 days from the date announced in the Royal Gazette. It can also be expected that the sub-regulations under the Royal Decree, which will stipulate details of Compliance Duties to the Business Operators, will be subsequently announced by the BOT shortly after the Royal Decree is enacted. Although the Draft Royal Decree will not impose license requirement upon the Business Operators in the same fashion as other financial services, such as, personal loan under the supervision of the BOT, the new measure under the Draft Royal Decree is likely to provide protection to general consumers who rely on Auto Hire Purchase and Leasing.

This newsletter is given as general information for reference purposes only and therefore does not constitute our firm’s legal advice. Any opinion stated in this newsletter is a personal view of the author(s) and not our firm’s official view. For any specific matter or legal issue, please do not rely on this newsletter but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.

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