Cash firm cleared of money lending
In a case that could dramatically change the city's lending industry, a court ruled that a cash-advance product offered to businesses is not a loan and does not breach the Money Lenders Ordinance.
Global Merchant Funding Limited was cleared yesterday of one charge of carrying on business as an unlicensed money lender after a trial at Eastern Court.
The ruling alarmed some in the industry, who say it goes against efforts to better regulate cash-advance products, but the man behind GMF hailed the verdict as 'excellent news' for small and medium-sized businesses.
GMF offers a merchant-cash-advance contract, under which it buys a merchant's future credit and debit card receipts at a discount, in return for offering cash up front. It takes a percentage of card sales directly from the merchant's processing bank and does not set a deadline for repayment. Prosecutors argued that the product was, in fact, a loan.
'The effective rates of return show that a very high level of interest is built into the purchased amount,' prosecutor Clifford Smith SC told the court.
But yesterday Magistrate Li Kwok-wai ruled that GMF had not been in breach of the ordinance. 'There have been and always will be newly emerging products,' he said.
The magistrate noted that a loan would usually carry a time element - a deadline by which it must be paid - but that this did not exist in GMF's cash advances.
'An important hallmark for a loan is missing,' he said.
The ordinance outlaws loans with effective annual interest rates of more than 60 per cent. A breach carries a maximum fine of HK$5 million and 10 years' jail. Companies taking Global Merchant's cash advances are sometimes charged more than the equivalent of a 60 per cent annual interest rate.
Accountancy-sector lawmaker Paul Chan Mo-po, who is expected to join the government as deputy financial secretary if the Legislative Council approves the creation of the post as part of a government restructure, said Legco's financial affairs panel might have to examine the case.
Retailers and bankers say the trial appears to be a test case that may significantly change the lending industry if businesses without proper licences are allowed to follow a similar business model.
One industry source, who asked not to be identified to avoid being associated with the case, said the young cash-advance industry had been moving towards getting in line with regulations, and that the decision went against that trend.
The source called the ruling significant and said many in the industry were watching to see what would happen next. GMF managing director Richard Grainger said the ruling was good for businesses and in line with how such products were treated in other markets.
'Since we set up our business in 2008, we have always acted in good faith and on the basis of solid legal advice,' Grainger said. 'We never believed that a money lending licence was required for our merchant cash advances, which is exactly the same situation in every other market where the [merchant-cash-advance] product exists, including the UK, US, Australia, Canada and Singapore.'
Grainger, once a senior director at Barclays Capital, started the firm with Avery Stone, a former MasterCard Worldwide executive, and Simon Zoen, previously of Citibank.