Shedding light on a pressing issue that is most likely to be on the rise owing to the economic crisis, Minister of Justice, Prison Affairs, and Constitutional Reforms, President’s Counsel Dr. Wijeyadasa Rajapakshe recently discussed how certain officials of banking and other financial institutions are abusing the law to rip off their clients. The law, known as the Parate law, which focuses on the seizure of unpaid property, has, according to the Minister, given unlimited powers to the boards of directors of banks and financial institutions.

This law is a mistake made in the past. Before it came into existence, the powers to decide on the seizure and auctioning of assets or property mortgaged to banks lay with the courts, which are more trustworthy than boards of directors of banks or other financial institutions with regard to taking fair decisions. However, the Parate law – which the Minister said was introduced as per the needs of financial institutions by transferring the said powers from the courts to the decision-making bodies of the institutions – is showing signs of becoming a menace, as certain officials of such institutions have reportedly used it to forcibly and unfairly seize and auction properties and assets based merely on one or two missed instalment repayments.

This issue may have been ignored or downplayed thus far. However, the prevailing socioeconomic climate, in which more people are susceptible to financial crises such as bankruptcy, is a good reason to evaluate whether this issue should or could be left unaddressed any longer. On the one hand, the people being inconvenienced because of a few corrupt, opportunistic officials who misuse the Parate law is a serious threat to the ordinary man’s financial stability and social security. On the other hand, the country’s banking and financial institutions, which are also suffering due to the economic crisis, should not be places that the people fear to enter.

The severance of the relationship between the two parties is not a situation an economic crisis-hit country can afford to deal with. Therefore, this menace needs to be addressed immediately. Now that the Minister in charge of Justice has paid attention to this, one of the best solutions would be to strip banks and other financial institutions of the power to unilaterally decide whose properties should be seized and/or auctioned. That power should again be vested with the judiciary, or an appropriate body that is authorised, or the matter should be considered for alternative dispute resolution. Given the sensitive nature of this issue, the ideal way would be to have in place a proper system, which takes into account all the relevant parties’ concerns, instead of a board of directors of an institution taking decisions in their own favour.

Banks and other financial institutions have a massive responsibility in this regard, which they must take seriously for the future of their businesses and for the well-being of millions of people who trusted them enough to become their clients. A number of institutional-level steps could be taken, especially in response to the allegation made by the Minister regarding officials’ involvement in the said racket, and one of the first steps that needs to be taken is to introduce or amend conflict of interest policies in a manner that prevents officials from purchasing seized properties through auctions. 

It is a very general practice in both public and private institutions to have in place conflict of interest policies in order to deter employees as well as other affiliates, who have influence on or are privy to the institutions’ decisions and activities, from gaining undue advantages through abusing their powers or position. The country’s general law should be utilised to identify officials who purchase such goods through non-employees, and those found guilty should be punished by institutional rules and regulations as well.

In addition, there needs to be clarity and agreement between banks and other financial institutions and their clients as to what specific conditions apply to the seizure or auction of property – how many instalments should one default before their properties are seized; what is the grace period after the seizure of goods? what is the lawful process of seizing property; and what are the reliefs provided to the client or the financial institution by the legal system are matters that should be clarified through the relevant law reforms and financial institutions’ policy reforms.