A Peek into Malaysia’s Proposed Consumer Credit Act
The blog section is rewritten in simplified English as follows: The Public Consultation Paper Part 1 was released on 4 August 2022 by the task force of the Consumer Credit Oversight Board. The Ministry of Finance, Bank Negara Malaysia (‘BNM’), and the Securities Commission Malaysia (‘SC’) supported this initiative. The survey was conducted to gather public feedback on the proposed Consumer Credit Act (CCA), which aims to streamline regulations within the credit industry. This proposal was first mentioned in the 2021 Malaysia Budget Speech. The main objectives of the CCA are to establish a regulated system for non-bank credit providers, enforce minimum conduct standards, and protect consumers from predatory practices through increased supervision and regulation.
The main aim of the CCA is to protect people who use credit by promoting professional standards, openness, and responsible lending while preventing unfair practices. It covers important areas such as good behavior, advertising, credit agreements, charges for borrowing money, checking if someone can afford to borrow, collecting debts, taking back items bought on credit, and providing help to people in financial difficulties. A 'credit consumer' can be a person or a small business that wants to borrow money mainly for personal or home use, businesses that borrow less than RM500,000, and people who act as non-profit guarantors. The CCA will also create a system that says credit providers must have a license and people who provide services to credit users or providers must register. A very important part of this system is the CCOB, which will be the authority in charge under the CCA.
According to the second part of the Public Consultation Paper released on April 5, 2023, the Consumer Credit Act (CCA) will be implemented in stages. Phase 1, which is scheduled for 2024-2025, will require non-bank credit providers and service providers that are currently not directly regulated to apply for permission and come under the regulatory framework of the CCA. This phase will include entities such as non-bank leasing and factoring companies, as well as those offering 'Buy Now Pay Later' (BNPL) schemes. It is important to note that non-bank credit providers that are already regulated by a Regulatory and Supervisory Authority (RSA) will not need to seek supervision from the CCA during this phase. In Phase 2, starting in 2025, the Consumer and Competition Bureau (CCOB) will take on regulatory powers for credit providers and service providers that are currently under the jurisdiction of the Ministry of Local Government Development (KPKT) and the Ministry of Domestic Trade and Consumer Affairs (KPDN). This means that licensed moneylenders regulated by the Moneylenders Act 1951 will be governed by the CCOB.
Kindly refer to the suggested schedule for putting the CCA into action.
The acronym ILB denotes Impaired Loan Buyers. Correspondingly, DCA refers to debt collection agencies, while DMA represents debt management agencies.
Specific important terms have also been defined as follows,
'Credit' refers to any kind of arrangement, agreement, or facility that leads to a person accumulating debt or taking on a financial responsibility. It also includes the ability to pay for goods or services in multiple installments.
'credit agreement' – a contract made between a lender and a borrower in which the lender provides credit.
‘credit consumer’ – (a) someone who acquires, has acquired, or plans to acquire credit mainly for personal, household, or domestic reasons; (b) an individual who operates a small or micro business and acquires, has acquired, or plans to acquire credit, as long as it does not exceed RM300,000; (c) any other individual or group of individuals as specified by the CCOB; or (d) an individual who acts as a guarantor, without the intention of making a profit, to a credit consumer falling under paragraph (a), (b), or (c), in relation to a credit agreement governed by the CCA.
'Credit business' refers to various financial activities such as lending money, offering pawnbroking services, providing hire purchase options, conducting credit sales, implementing BNPL (Buy Now Pay Later) schemes, engaging in leasing agreements, or practicing factoring. This definition also encompasses credit-related activities conducted in accordance with Shariah principles.
'Credit service business' refers to various activities related to loans and financing that may have encountered difficulties. This includes the acquisition of loans or financing that have become impaired, the provision of debt collection services, offering debt counselling and management services, providing online crowdlending services, or engaging in repossession activities.
'credit provider' - an individual involved in the operation of a credit enterprise;
'credit service provider' - an individual who operates a business that provides credit services.
In the context of a licensed credit provider or registered credit service provider, a 'controller' refers to an individual who meets one or more of the following criteria: (a) holds at least 33% of the voting shares in the licensed credit provider and has the authority to exercise or control the exercise of those votes; (b) possesses the authority to appoint a majority of the directors within the licensed credit provider or registered credit service provider; or (c) holds the power to make decisions regarding the business or administration of the licensed credit provider or registered credit service provider, and can ensure those decisions are implemented.
4. Suggested Framework for Administration
The CCA brings forth a two-fold process for granting permission, which comprises of granting licenses to credit providers and registering credit service providers. The main focus of the authorization process is to assess whether an organization can maintain high standards of professional behavior and guarantee that its operations do not harm consumers. The CCOB takes into account various factors, such as the applicant's internal setup, ownership structure, financial capabilities, and the expertise and skills of its crucial staff members.
An essential aspect of the governance criteria is the separation into organizational necessities and board obligations. Organizational necessities encompass distinct structural and operational demands, like the presence of a framework with clearly assigned roles, the execution of an efficient risk management system, and the establishment of a thorough complaints handling system.
The duties of the board revolve around the overall direction of the company, making sure rules are followed, managing risks, and upholding ethical behavior. To illustrate, the board might consist of individuals with different expertise like finance, law, and technology, but its ability to discuss matters should not be hampered by its size. It is also necessary to have important roles like an internal audit function and a compliance function, which are supervised by experienced staff. The main goal is to uphold strong professional principles and safeguard the interests of customers.
This framework mirrors the existing regulations set by Bank Negara Malaysia (BNM) for the entities it oversees.
The CCA additionally specifies extensive monetary expectations for lenders and providers of credit services. These organizations must exhibit adequate financial means that align with the intricacy and size of their operations.
Besides these criteria, companies are also obligated to present annual audited financial reports to the CCOB or applicable RSA, validating sufficient financial reserves for the forthcoming 12 months.
6. Health and Integrity
The CCA enforces certain standards for competency and honesty on all providers. Essential individuals, including those in controlling positions, as well as directors and senior executives, must show their capacity to carry out their duties in a proficient, trustworthy, and ethical manner.
These people are obliged to follow the suitable standards mentioned in Appendix 2 of the Part 2 Public Consultation Paper. If there are any modifications in the position of controller or chief executive officer, they need to obtain written permission from the CCOB in advance.
Companies providing Islamic credit services are required to have a proper framework of Shariah contracts that align with their business operations. Authorized providers of Islamic credit are expected to hire a Shariah consultant or form a Shariah committee and establish internal guidelines for Shariah governance. If these providers have any inquiries, they can approach the Shariah Advisory Council (SAC) of BNM for clarification.
According to the CCA, specific business activities are expressly forbidden, such as:
9. Recommendations for Service Providers
Financial institutions have a duty to honestly advertise their products and services without engaging in any deceptive practices. They need to offer transparent, precise, and comprehensive information about what they offer to their customers. This will enable consumers to make well-informed choices throughout their interactions with these institutions.
The conditions of use must uphold concepts of equity, giving customers the freedom to switch between various offerings or suppliers. Any costs linked to ending an agreement prematurely must only cover the essential expenses for recuperation. Expenses and interest rates should be just and not overly high.
Before entering into any credit agreement, providers must conduct a thorough evaluation of the client's ability to repay, using the Debt Service Ratio (DSR) calculation outlined in paragraph 14.6 of CP2. This assessment helps determine if the client has enough financial capacity to meet their repayment obligations. Providers should establish lending policies that take into account the DSR values, allowing for additional expenses that the client may have and reducing their susceptibility to unexpected financial difficulties. During periods of financial hardship, providers are required to assist clients by modifying credit agreements to accommodate the changed circumstances.
10. Alterations in Hire Purchase Scheme Framework
To begin with, the traditional way of calculating interest for fixed rate hire purchase loans, known as the Rule of 78, will no longer be used because it is unfair. The Rule of 78 is a method that assigns a greater portion of interest payments to the early stages of the loan. This means that borrowers end up paying more interest and less principal at the beginning, and more principal and less interest towards the end. So, if they want to pay off their loan early, they end up paying more than expected. This method has been recognized as unfair worldwide, especially for those who want to settle their loans early, as it leads to a higher outstanding principal amount. It is already prohibited in countries like Australia, New Zealand, the UK, and some states in the US. Instead, the reducing balance method will be used, which calculates interest based on the remaining loan balance. This change allows hire purchase providers to only offer fixed and variable rate loans, making the charges more fair and understandable for consumers.
Next, the changes allow companies that offer hire purchase services to choose to use digital and electronic signatures and send notifications through electronic means. Furthermore, there will be a maximum cap of 17% per year for the Effective Interest Rate (EIR) in both fixed and variable rate approaches. The EIR accurately represents the actual expense of a loan by considering the impact of compounding, providing hirers with a clearer understanding of their financial responsibilities.
Finally, hire purchase companies will need to reveal the Effective Interest Rate (EIR) before the contract is signed, in their ads, and on their online platforms. To meet this obligation, companies are anticipated to make necessary changes to guarantee openness and availability of this data for customers.
In summary, the CCA will bring about significant alterations to Malaysia's credit sector. Although the exact schedule for its complete implementation is yet to be disclosed by the CCOB, the gradual introduction of the CCA signifies the upcoming reform of the industry's regulatory environment.
In the meantime, it is wise for all lenders and entities offering credit services to familiarize themselves with the suggested guidelines and regulations outlined in the CCA.
