First-step analysis: fintech regulation in Pakistan

Financial regulation

Which bodies regulate the provision of fintech products and services?

The provision of fintech products and services is regulated by the Securities and Exchange Commission of Pakistan (SECP) or the State Bank of Pakistan (SBP), depending on the nature and scope of the relevant fintech products and services.

Which activities trigger a licensing requirement in your jurisdiction?

The following activities require a licence before they can be undertaken:

• lending;
• taking deposits;
• dealing in foreign exchanges (which requires an authorisation from the SBP);
• offering investment advisory services (which includes advising others of the value of securities or of the advisability of investing in, purchasing, or selling of securities for remuneration, or both;
• managing investment funds;
• offering discounting services;
• offering payment services; and
• secondary market loan trading, which can only be directly undertaken by, or through, a licensed intermediary.

Is consumer lending regulated in your jurisdiction?

Yes, consumer lending can only be undertaken pursuant to a banking licence issued by the SBP, or a relevant non-banking finance companies (NBFC) licence (for example, a housing finance services licence, an investment finance services licence or a leasing licence) issued by the SECP. Only companies incorporated in Pakistan are eligible to apply for any NBFC licence and any potential licensee must satisfy, among other things, the paid-up capital requirements that have been prescribed for the specific licence, and its directors and top management must satisfy the relevant ‘fit and proper’ criteria that have been notified.

Are there restrictions on trading loans in the secondary market in your jurisdiction?

The only secondary market operational in Pakistan is the Pakistan Stock Exchange Limited (PSX). For non-government debt securities to be traded on the PSX, the securities must satisfy the criteria prescribed under and be listed according to the procedure outlined in the Rule Book of the PSX.

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

Collective investment schemes (CIS) are regulated by the SECP under the NBFC (Establishment and Regulation) Rules, 2003 and the NBFC and Notified Entities Regulations, 2008. CIS have been defined as any arrangement with the sole purpose of the collective investment of funds in a portfolio of securities or other financial assets for profit, income or other returns, where the participants who have pooled the funds do not have any day-to-day control over the management of the scheme. CIS do not include investment funds that are governed by a more specific legal regime (eg, private funds and employees’ provident funds, etc).

CIS operate as a trust, with the investors in the scheme being the beneficiaries of the trust and the manager of the scheme being the trustee. Prior approval of the SECP is required to act as CIS trustees and only banks, registered central depository companies and NBFCs with the relevant licences are eligible to act as CIS trustees. SECP approval must be procured before any investment can be solicited for the scheme in question.

Peer-to-peer, marketplace lenders or crowdfunding platforms are not typically considered CIS.

Are managers of alternative investment funds regulated?

Yes, SECP approval is required to act as a manager of an alternative investment fund. Only banks, registered central depository companies and NBFCs with the relevant licences (including lending NBFCs, asset management companies and investment finance advisory NBFCs) are eligible to act as managers of alternative investment funds.

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

There is no specific regulation for peer-to-peer or marketplace lending, therefore the two activities are prohibited, as the provision of finance is a regulated activity that requires a relevant licence either from the SECP or the SBP.

However, to spur innovation in its regulated sectors, the SECP is currently operating a regulatory sandbox that allows entities and firms to conduct limited scale live tests of innovative products, services, processes, and business models in a controlled environment. The SECP has granted approval under the first cohort of regulatory sandbox users to Finja, a peer-to-peer lending platform, for a period of up to six months. The results, expected in August 2021, will determine the future course of action regarding the introduction of any regulation of peer-to-peer lending.

The regulatory sandbox initiative is still operating and entities can apply to be a part of it.

Describe any specific regulation of crowdfunding in your jurisdiction.

Crowdfunding is currently prohibited. The SECP has granted approval under the first cohort of regulatory sandbox users to the Pakistan National Investor Portal, an equity crowdfunding platform, to undertake crowdfunding according to its prescribed terms and conditions for a period of up to six months. The results, expected in August 2021, will determine the future course of action regarding the introduction of any regulation of crowdfunding.

The regulatory sandbox initiative is still operating and entities can apply to be a part of it.

Describe any specific regulation of invoice trading in your jurisdiction.

There is no specific regulation for invoice trading. However, the provision of discounting services is a regulated activity that requires discounting services or investment finance services NBFC licence. Discounting services, under the relevant regulations, cover the business of discounting financial instruments, whether on a conventional or an Islamic basis. As invoices are typically considered financial instruments, undertaking invoice trading requires one of the two aforesaid NBFC licences. Scheduled banks are also permitted to provide invoice discounting facilities.

The alternate regime available for undertaking discounting is through the creation of a special purpose vehicle (SPV) under the Companies (Asset Backed Securitization) Rules, which requires the prior approval of the SECP. Under this regime, the originator (ie, the party wishing to raise finance) sells or assigns its present or future receivables, or both, to an SPV against money that is payable on the consummation of the sale or assignment. The SPV, in turn, raises funds through issuing term finance certificates or another debt instrument. Any advertisement or other invitations to the public, including public announcements to invest in such instruments, require the prior approval of the SECP.

Are payment services regulated in your jurisdiction?

Yes. The provision of payment services is regulated by the SBP under the Payment Systems and Electronic Fund Transfers Act that regulates payment gateways, payment aggregators, credit and debit cards, and automated teller machines. The SBP has also notified the Electronic Money Institutions Regulations, under which an e-money institute (EMI) licence can be acquired. An EMI may issue e-money payment instruments, distribute e-money payment instruments, redeem e-money payment instruments, acquire payment instruments of other EMIs and banks, and undertake any other activity permitted by the SBP. The provisions of the act and the regulations apply even to transactions occurring outside Pakistan insofar as they are directly or indirectly connected to Pakistan, or have an effect on or bearing in relation to persons, payment systems or events within Pakistan.

The law mandates that any service provider that imposes a fee on any consumer for providing these services must notify the consumer of the fee.

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

While there are no such specific laws or regulations, the antitrust laws of Pakistan generally prohibit:

•  the abuse of a dominant position through any practice that prevents, restricts, reduces or distorts competition in the relevant market; and
• entering into any agreement or making any decision in respect of the production, supply, distribution, acquisition or control of goods, or the provision of services that have the object or effect of preventing, restricting, reducing, or distorting competition within the relevant market.

The antitrust laws are administered by the Competition Commission of Pakistan.

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Yes, fintech companies that sell insurance products are regulated under the Insurance Ordinance, 2000 and the Insurance Rules, 2017. Insurance products can only be sold for reward either by agents of the insurance company or insurance brokers that require a licence from the SECP to operate. Only companies are entitled to apply for an insurance broker licence. Any promotional material for life insurance products must conform with any relevant directions given by the SECP. There are no special regulations covering any third party that markets insurance products for fintech companies.

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

Credit information services can only be undertaken by credit bureaus licensed by the SBP under the Credit Bureaus Act. Only locally incorporated public limited companies are eligible to apply for the licence required to operate as a credit bureau, but there are no restrictions on foreign ownership of such companies. Every institution that is authorised to extend credit or finance (credit institutions) is required to be a member of a credit bureau and to furnish credit information to the credit bureau regarding its debtors. The credit bureau in turn may provide the collected credit information regarding debtors to credit institutions without procuring the consent of the debtors.