SFCG Co.
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| File:Public corporation (first section of Tokyo Stock Exchange; number 8597; listed in 1999) | |
| Industry | Finance industry |
|---|---|
| Headquarters | Nihonbashi Muromachi Center Bldg., 3-2-15 Muromachi, Nihonbashi, Chuo Ward, Tokyo, Japan 103-8305 (Tel: 03-3270-1248) |
Key people | Kenshin Ōshima (President) |
| Products | Loans to small businesses underwritten by guarantors, secured loans, commercial discount notes |
| (separate) 60,791 million yen (consolidated) 85,965 million yen (As of July 2005) | |
Number of employees | 1841 |
| Parent | KE Holdings 52.92% |
| Subsidiaries | T Zone Holdings |
| Website | http://www.sfcg.jp/ |
| Footnotes / references Stock capitalization: 79,149.15 million yen Annual closing date: June 31 | |
SFCG CO.,LTD. (株式会社SFCG), a subsidiary of KE Holdings (株式会社KEホールディングス), is a credit agency.
The company was founded in 1978 under the name Shōkō Fund (株式会社商工ファンド), and changed to its current name in 2002.
Its main areas of business include loans to businesses and discounting bills.
Characteristics of SFCG
Since the time when it traded as Shōkō Fund, SFCG has extended credit at interest above the limit set down by the Japanese Interest Rate Restriction Law, in return for the provision of guarantors, to corporations which it judges to be unable to repay debts to banks or other financial institutions, advertizing as a sales point that its loans are unsecured. Its sales staff are given difficult quotas, in order to increase the balance of credit supplied, and thus SFCG's profits. In order to achieve these difficult quotas, sales staff use a variety of forceful tactics to extend credit to companies with no credit worthiness - in other words, to perform credit manipulation - an act which could be considered reckless. Extending credit time and again in this reckless manner has resulted in a very high proportion of cases where the indebted party has remitted on its repayments. While these loans are indeed unsecured when the contract is concluded, SFCG requires security in the form of guarantors, and creates notary deeds so that assets can be mortgaged whenever necessary; for these reasons, they are certainly not unsecured loans in any real sense.
Another feature of SFCG is its method of "smart debt collection using the law" (in the words of its president). SFCG explains its methods to society by saying that imposing high interest rates reduces the risk that the sums borrowed by companies with little credit will become bad debts. However, SFCG employs a powerful team of lawyers to take on borrowers and guarantors who are ignorant of the law, as a strongarm debt collection tactic - a tactic comparable to twisting the arm of a baby. This can be considered to be using legal techniques to abuse the law. In this way, SFCG manages to avoid any loss by collecting both the principal and the interest, meaning that it takes no actual risk, apparently making its own argument for the imposition of high interest rates irrelevant. SFCG's strongarm debt collection methods are looked down upon in the legal world, and have been described as terrorism using lawyers.
Looking at the profitability produced by these tactics from the point of view of the share price alone, one can observe that SFCG has the support of the stock market, and particularly foreign investors, but on the other hand, its forceful lending and collection tactics have become a social problem, and its CEO has been called before the Diet to testify under oath.
On November 25, 2005, its method of "smart debt recovery using the law" (in the words of its president) was found to be a severe breach of the Money Lending Business Law, and its Kantō offices were ordered to suspend business for 12 days, from December 5, 2005 (22 days in the case of the Tokyo and Ōmiya branches, which were found to be particularly serious offenders). In response, SFCG requested a provisional ruling confirming that the decision by the Tokyo Local Court and Tokyo High Court was invalid, but this was denied.
SFCG has received much criticism for its method of pursuing profit, which is to "take as much interest as it can from borrowers, and as much capital as it can from guarantors."
SFCG's sales methods
The method of selling used by SFCG is to start with an approach to the manager or accountant of a business - a method commonly known as telephone appointment sales. The list of phone numbers used is based on data from the phone book, combined with results obtained from a private credit investigation agency, and is known as the "GS list." Companies who have a low credit rating are often selected by sales representatives as the targets of calls, since these companies are likely to find it difficult to borrow from institutions such as banks, creating demand for credit.
Clients who express interest on the phone are sent a credit application form via fax, and the information entered on this is used to conduct a credit screening. In addition to checks on the amount being borrowed from banks, the credit screening also involves checks on amounts borrowed from non-banks and the status of any financial trouble.
One feature characteristic of SFCG's sales methods is that, since the rating of sales representatives depends on obtaining new clients and guarantors, credit is frequently extended to the spouses of clients, or to existing clients, who are given a sub-number and treated as a new client, in order to make quotas. If a borrower becomes unable to pay, rather than the debt being passed on to the guarantor, the guarantor is often treated as a new client. These tactics are known as "making up new clients," and are standard practice inside the company.
However, these "made up new clients" are not new clients by the meaning of the term as it is used in society in general.
As the number of new contracts announced by SFCG includes a considerable number of these made-up new clients, it is necessary to take care when using this figure to determine the performance of the company.
Regardless of the total balance of the guarantee provided by existing guarantors, the addition of a new guarantor is often made a condition of new lending, in order to meet the quota for new guarantors.
In short, as SFCG's dealings so often involve companies with money problems, these sales methods have been heavily criticized by society, for supplying credit beyond reasonable limits.
Methods used for making contracts
A characteristic of SFCG's contract negotiations is that together with a contract, SFCG gives clients a large number of documents to sign or stamp with a seal, and requires a certificate of authenticity for the seal. These documents are used to produce official certificates, which make it possible to take swift legal action in the case of any trouble.
The major documents clients are asked to sign include the following.
- A loan certificate
- A joint guarantee contract
- A letter of proxy for creating a notary deed
- Privately made money bills
SFCG's debt collection methods
In practice, SFCG uses a method which employs the insurance system known as underwriting, concluding a joint guarantee contract with the guarantor without a proper explanation, so that the guarantor does not understand that the total specified in the joint guarantee contract may be several times greater than the sum loaned.
As a result, if the borrower loans more than guarantor believes has been loaned, without the guarantor's knowledge, the guarantor has responsibility for all of this debt. There have been many case where guarantors have been forced to make repayments on behalf of a debtor, and lawsuits based on claims that an underwriting contract is invalid as a result of misunderstanding have been filed all over Japan.
A feature of SFCG's debt collection methods is that their loan certificates and joint guarantee contracts take the form of a notary deed allowing forcible execution, which makes it possible to carry out forcible execution without a judgment by a court. The borrower and guarantor are encouraged to sign or stamp a letter of proxy used to create the notary deed allowing forcible execution without understanding the meaning of the letter of proxy, and cleverly tricking into giving approval for the letter of proxy, upon which the notary deed allowing forcible execution is created. This method of creating the notary deed was deemed a problem by the supervisory authorities, and led to the action taken in 2005.
In this way, SFCG leaves the borrower and guarantor up with no way to escape, and if repayment is delayed even slightly, proceeds with forcible execution using the notary deed allowing forcible execution.
One example of SFCG's heavy-handed debt collection methods is that, if a lawsuit is filed for reimbursal of excess payment, or if a lawyer is involved to organize debts, in many cases SFCG immediately enters a lawsuit related to its money bills. These privately made, non-order, pay at sight money bills, which have been called toy money bills, are not intended for distribution at a clearinghouse, and list SFCG as the recipient and location for payment. SFCG does not process these bills, declaring them to be dishonored, quickly obtains a judgment based on a single verbal declaration and the evidence at hand, and then proceeds with forcible execution.
It is also common practice for real estate property belonging to the borrower or guarantor to be provisionally registered as mortgaged based on the notary deed (naturally, in almost all cases without the borrower being aware that this has been done).
Based on the notary deed, the wages, real estate or other assets belonging to the guarantor are seized without hesitation. This has become a social problem, as there have been cases where it has led to the guarantor being dismissed from employment.
As its purpose is to protect the interests of the creditor, the procedure for provisional seizure is carried out quickly, with the submission of the documentary evidence and a simple verbal questioning, and a decision on whether to proceed is made with no chance given for the debtor and guarantor no chance to appeal. If it proceeds, in the case of real estate, a case of provisional seizure is registered with a court, and in the case of wage money, the creditor makes an application to the executor, who carries out the provisional seizure. (After the order for provisional seizure has been granted, it is possible to appeal, but a record remains in the register, which may make it more difficult for the borrower to obtain credit from banks and other lending institutions.)
Collection of bad debts from employees
SFCG often increases the number of new contracts using "made-up contracts", as stated in the section on business methods, but if these contracts result in bad debts, SFCG itself or its subsidiary, the Justice debt collection business, claims compensation for damages from the employees responsible or their guarantors, alleging that the company has suffered due to credit extended using improper credit manipulation.
Normally, the rules of employment of companies state that the company has the right to claim damages against or punish employees who damage the company by improperly manipulating credit information, and companies naturally have the moral right to damages in this case. However, SFCG claims compensation from employees do this with the recognition of the company, extending credit to achieve quotas (in many cases employees, however reluctant they may be, are left with no choice but to carry out improper credit manipulation such as made-up contracts due to the pressure to achieve quotas applied by their superiors).
In fact, some former employees have taken back real estate and wages seized from them by the company as a result of legal judgments for them. However, the increasing impetus in recent times to lower the upper limits on interest rates, meaning that it is no longer possible to expect to achieve the same profit levels as before, has led the company to give unspoken instructions to conduct improper credit manipulation. As such, it is morally unacceptable to claim damages for these acts.
Defeats in court
The heavy-handed collection methods, where SFCG uses privately made money bills and notary deeds so that debtors are denied the chance to appeal their debt until forcible execution is carried out, and aims to retain excess payment, which is improperly earned income, by preventing debtors from appealing for its return, has been identified as a problem in legal circles.
On February 20, 2004, the Japanese Supreme Court handed down a judgment which proved severely damaging to SFCG. This was due to a strict application of Article 43 of the Money Lending Business Law, which stated that there was no obligation to pay interest above the upper limit for interest rates given in documents made and issued by SFCG. The section giving supplementary opinions contained comments on "withholding interest" and "the 'loss of profit' section when interest above the interest rate limit is not paid", clearly making the case for protection of debtors, and stating that "this interest cannot be said to be interest paid voluntarily by agreement", a severe judgment which indicated that the culture at SFCG was legally unjustifiable.
This judgment affected the entire high-interest credit industry, as it meant that credit agents lending at a rate over the interest rate limit could no longer deal in the immediate issual of Article 17 and 18 documents. As can be seen from these judgments, it became more difficult for SFCG and other credit agents to maintain their position as high-profit, high-interest lenders.
These additional opinions were used as a clear precedent in a judgment over a dispute regarding interest rates over the upper limit. The judgment stated that "even if there is no overt compulsion, if there is compulsion in practice, the payment cannot be said to be a voluntary payment of interest." This resulted in a loss for Citiz, a subsidiary of the major consumer credit firm Aiful.
As a result of this judgment, it became impossible in practice to deal in credit with interest rates in the so-called "gray zone".
The money bill section of the Tokyo Local Court handed down the judgment that money bills which are intended not for distribution in the market, but only to enable the smooth flow of capital are not consistent with the purpose of money bill lawsuits, and made the unusual request that SFCG not file any money bill lawsuits. Of all the money bill lawsuits filed with the Tokyo Local Court, 80% (1500 cases) were brought by SFCG.
In 2000, the Tokyo Local Court criticized the methods of Shōkō Fund (as it was then called), saying that "the use of the legal procedure of underwriting can be said to have been used as a tool to make it less clear what is being guaranteed, and any subsequent changes to the debt being guaranteed, in particular its reimbursement or cancellation by other means, or its reduction due to the application of the Interest Rate Restriction Law, and conceal these facts from the guarantor. ... (section omitted) ... In addition, this use of the legal procedures of money bill lawsuits and underwriting are an attempt to exploit weak points in the law, which serves to govern public life, with the aim of obtaining illegal profit for the company itself. As such, it is proper to say that they are acts which run counter to the public good, and are not acceptable." (Tokyo Local Court 2000 (Ne) No. 4474)
The Sendai Local Court ruled that in cases where a lawyer was engaged, forced execution must not be employed for the reason that the debtor has engaged a lawyer, as there exists a duty of care requiring discussions to be held in a legal context, thus dismissing SFCG's debt collection methods as improper.
As a result of the Supreme Court judgment on February 20, 2004, the case was re-examined in the lower court, and the return of excess payments was allowed. It is likely that in the future, the number of requests for the return of excess payments will increase.
In recent years, SFCG has lost many cases against it, as with those above, demonstrating that its debt collection methods and high-interest lending were illegal.
The SFCG subsidiary SVI (now T & A) used a forged letter of proxy to make it appear that an individual in an unconscious state had made a contract to sell land assessed to have a value of 2.2 billion yen at 900 million yen, and attempted to transfer the registration of the land. They were succesfully sued by the family of the owner, who claimed that the letter of proxy was forged and that the owner did not have the ability to make declarations of intent. This and other incidents revealed the social problems caused by abuse of the law by the culture of the SFCG group.
On November 25, 2005, the Kantō offices of SFCG were ordered to suspend operations for 12 days (22 days in the case of some brances), for improperly obtaining blank letters of proxy, and using them to create and execute notary deeds, a serious breach of credit law. SFCG applied to the Tokyo Local Court for a preliminary judgment halting the execution of this punishment but was denied it, and then made an immediate complaint objecting to this ruling to the Tokyo High Court, which was rejected.
These legal rulings can be seen as an strong expression of the view of the legal authorities on SFCG's use of the law, which has been characterized as "terrorism using lawyers" and "using the law as a debt-collection service." This is likely to make it extremely difficult for SFCG to pursue its work of "smart debt collection using the law" (as the company president puts it). The company states that the Supreme Court is still considering a special complaint, but it appears that in the end no special complaint was made to the Supreme Court.
Response by government
SFCG's heavy-handed method of obtaining a notary deed giving permission for forcible execution has also been seen as a problem by the government, causing the Ministry of Justice to tighten up the rules on the procedures for making notary deeds, with the aim of making these appropriate.
Attention focused on the government's future handling of high-interest credit agencies, and statements from debtors of SFCG about the company's lending and collection methods were brought up at the Financial Services Agency's 6th Conference on the Money Lending System. Against this background, on November 25, 2005, the debt collection method used by SFCG involving creating a blank letter of proxy in order to make a notary deed, in such a way that the client would not have time to notice, was found by the Financial Services Agency to be a serious breach of the Money Lending Law, and an order for suspension of business until December 5, 2006 (December 26 in the case of the Tokyo and Ōmiya branches) was issued. As a result, SFCG became unable to carry out any of its business, apart from work necessary to respond to the lawsuit or arbitration, or any other work deemed necessary by the Kantō Financial Office.
This order for suspension of business was in response to the incident at the Omiya branch where a blank letter of proxy, created for a joint guarantor who had entered a joint guarantee contract of 2 million yen, was used to make a notary deed stating that the sum of 5.94 million yen would be guaranteed (a breach of Article 20 of the Money Lending Law, which prohibits the procurement of blank letters of proxy), and the incident at the Tokyo branch where real estate obtained by a borrower after obtaining credit was designated as collateral without notice (a breach of Article 17 of the Money Lending Law, which requires written contracts to be issued). Generally, the order for suspension would only be applied to the Tokyo and Ōmiya branches, but as the Financial Services Agency discovered 75 cases across Japan where blank letters of proxy had been obtained, it was found that SFCG as a company had given directions to use collection methods in violation of the law, the suspension order was applied to all branches.
SFCG applied to the Tokyo Local Court for a provisional injunction, stating that "no actual violation of the law has occurred", but as might be expected from this court's judgments and stance towards SFCG's collection methods, this application was denied. SFCG made an immediate complaint to the Tokyo Supreme Court, but this was also denied. SFCG gave indications that it was considering making a special complaint to the Supreme Court, but appears not to have gone ahead with this.
Many comments have been made arguing from the point of view of "high-interest" borrowers, including the Japan Federation of Bar Associations, which issued a Statement of Opinion (Request) titled "Requesting a Reform of the Regulations on Implementing the Law Related to Restrictions on the Credit Industry". This advocates restricting "high-interest lending" and requiring contracts stating that no "penalty" will be applied to borrowers who do not pay interest which is above the level of the "Interest Rate Restriction Law". Given these facts, and from observing the Financial Services Agency's Conferences on the Money Lending System, it is easy to imagine that it will become impossible to take interest at above the level of the "Interest Rate RestrictionLaw" (known as "gray-zone interest").
Judgments and requests calling for the tightening of restrictions on high-interest lending continued, and on January 13, 2006, the Supreme Court ruled that in cases involving a clause on "penalties due to expiry of a time period", sums "deemed to be for repayment" would not be admitted. This ruling means that if a "penalty due to expiry of a time period" occurs due to the failure to pay interest at a level about that set down in the "Interest Limit Law", and the borrower is forced by a clause to make a lump repayment, this does not apply to sums "deemed to be interest" which were paid voluntarily by the borrower. The ruling shook credit businesses dealing in gray-zone interest to their foundations. In response to this ruling, on February 8, 2006, the Financial Services Agency brought out a "(Draft) Order from the Cabinet Office Reforming the Regulations on Implementing the Law Related to Restrictions on the Credit Industry".
The main reforms in the draft are as follows.
- In this relation, the regulations on implementing the law (below, "the regulations") Article 15 Section 2, it is stated that by giving explicit details, including the contract number, for a lending contract relating to a debt which has been repayed, these details may replace the previous information; this statement is deleted.
- Article 21 Section 2 of the law gives regulations related to demands for payment equivalent to those of Article 19 Section 4; these are deleted.
- Article 17 Section 1, on the written document at the time a contract is concluded states that "if there are penalties due to expiry of a time period, these are to be noted, with details"; to this is added, "(with the statement that these shall only be effective only to the extent that they do not exceed the rate of interest set down in Article 1 Section 1 of the Interest Limit Law)". The same statement is added to Article 14 Section 1 Subsection 1 (XIV), Article 14 Section 2 Subsection 8, Article 26 Section 5 Subsection 3, Article 26 Section 5 Subsection 3, Article 26 Section 10 Subsection 3, Article 26 Section 15 Subsection 3, Article 26 Section 21 Subsection 3, Article 26 Section 7 Subsection 5, Article 26 Section 23/10 Subsection 5, Article 23/13 Section 5 Subsection 3 and Article 26 Section 23/17 Subsection 5.
These reforms make it impossible in practice to receive gray zone interest using sums "deemed to be repayments".
At the Conference on the Money Lending System held on April 21, 2005, the policies of abolishing gray-zone interest and lowering the upper limit on interest were supported by a large majority of members, but some of those in the credit services industry opposed this decision, saying that if interest rates were lowered, more people would fall victim to loan sharks, and the opinion of the credit service industry side was also given in the preliminary response drafted. However, during the meeting, there were apparently points where the Chairman chastised the credit agency members for the forcefulness of their objections to lowering the interest rate limit.
Response via legislation
In response to the large number of victims of underwriting contracts by credit companies, civil law was reformed to protect borrowers and guarantors, with the following rules set down.
- Underwriting contracts with no limit are invalid
- Guarantors are only obliged to insure the credit until the expiry date of the original principal, which is set at five years from the date of the contract, or three years in the case of a contract with no limit set.
- If the main borrower or guarantor is subject to forcible execution, starts proceedings for bankruptcy or dies, guarantors are not required to guarantee credit extended subsequently
- Guarantor contracts, including underwriting contracts, are invalid unless they are in written form
The January 13, 2006 ruling by the Supreme Court on gray-zone interest contracts stated that in cases involving a clause on "penalties due to expiry of a time period", sums "deemed to be for repayment" would not be admitted. On February 8, 2006, in response to this, the Financial Services Agency expressed the intention of reforming this area of law, as detailed in the "Order from the Cabinet Office Reforming the Regulations on Implementing the Law Related to Restrictions on the Credit Industry". For details of the reforms, see the section on the response by government.
Other events
The judicial scrivener commissioned by SFCG to create notary deeds received a warning from the Tokyo Judicial Scriveners Association for creating notary deeds without following the proper procedure, and the Tokyo Law Office, which is the government agency with jurisdiction over the scrivener, is reviewing possible penalties, including a ban on performing further work (in other words, removing the right to work as a judicial scrivener).
On November 25, [[2005], the Financial Services Agency found SFCG guilty of a serious breach of the Money Lending Law, namely securing receivables by means including forging notary deeds, and ordered it to suspend business. On November 29, 2006, in response to this, the Tokyo Credit Agency Association ("tokinkyo") temporarily revoked SFCG's membership. Later, on December 12, 2005, an extraordinary meeting of the Board of Directors was held, and the company president and employees were summoned and given a chance to explain themselves. On the same day, the Board of Directors suspended the membership rights of all members (with obligations remaining) for six months.
In view of the fact that such a strict punishment was handed down by a group of businesses in the same industry, it is no exaggeration to say that SFCG's credit collection practices had gone beyond the normal bounds considered acceptable.
Related rulings
- The case in which the rules on "sums deemed to be for repayment" (Article 43 of the Money Lending Law) were applied strictly, and if documents were not complete, it was deemed that the conditions for "sums deemed to be for repayment" were not met, and the payment was remanded.
- The case in which the rules on "sums deemed to be for repayment" (Article 43 of the Money Lending Law) were applied strictly, and if clearly stated obligations for "payments above the interest rate limit" were set down, or other obligations were set down which in practice entailed such payments, such as "clauses on penalties due to expiry of a time period", it was deemed that the conditions for "sums deemed to be for repayment" were not met, and the payment was remanded.
- The ruling finding that SFCG had breached the law, by exploiting the system of bills and bill suits, when it filed a bill suit requesting a money bill related to a bill made by the company itself drawn on the main borrower and joint guarantor, at the time of extending credit.
External links (in Japanese)
- SFCG Co., Ltd.
- The 146th session of the Diet - November 11 - House of Councillors Finance Committee - Investigation into finance and credit (The President of Shoko Loan was called before the House in relation to the problems surrounding the company)
- The 146th session of the Diet - December 14 - House of Councillors Finance Committee - Investigation into finance and credit (The President of Shoko Loan was called before the House in relation to the problems surrounding the company)
- Financial Services Agency - 6th round-table conference on the credit business system
- Financial Services Agency - 7th round-table conference on the credit business system
- Financial Services Agency - 8th round-table conference on the credit business system
- "On the action taken by the government in relation to SFCG Co. Ltd." - November 25, 2005 - Financial Services Agency
- "On the action taken by the government in relation to credit agencies" - November 25, 2005 - Kanto Financial Office
- "Notice" November 2, 2005 - Kanto Financial Office
- "Suspension of membership of SFCG Co. Ltd. (as of December 12, 2005)" Tokyo Credit Agency Association (tokinkyo)
- Home page of the Financial Service Agency's Conferences on the Money Lending System, containing minutes and submitted documents
- Tokyo Credit Agency Association ("tokinkyo")
External links (in English)
- SFCG Company website
- Supreme Court ruling blow to moneylenders
- FSA tells loan giant to suspend operation
- A brief biography of Kenshin Oshima, president of SFCG Co.
- Shoko (Small Business) Lenders
Sources
Much of the information in this article was translated from the equivalent article in the Japanese Wikipedia, as retrieved on November 1, 2006.