The Consumer Credit Bill, targeted for tabling in Parliament in the fourth quarter of 2023, will strengthen the protection for consumers while supporting the development of a consumer credit industry that effectively serves the needs of individuals and small businesses.
The Consumer Credit Act (CCA) will regulate and supervise the non-bank credit providers and credit service providers which are currently unregulated by any ministry or agency—in particular, businesses carrying out Buy Now Pay Later activities, leasing and factoring services; debt collection agencies; impaired loan buyers; and debt counselling and management services.
The Consumer Credit Oversight Board (CCOB) Task Force has recently released the second public consultation paper (CP2) which provides further details on the implementation of the CCA.
CP2 is published subsequent to the issuance of Consultation Paper (Part 1) on Aug 4, 2022.
The task force said it has received constructive feedback from various stakeholders in relation to Part 1 of the document and further gathered specific perspectives via several industry townhall sessions held in August 2022.
“All views, comments and proposals have been duly considered in setting forth the proposed detailed requirements for the regulatory framework targeted for entities carrying on the business of providing credit and credit services,” it said on its website.
The CCOB Task Force, led by the Ministry of Finance and the Securities Commission Malaysia (SC), was set up in July 2021 to drive the enactment of the CCA.
This effort is undertaken in close collaboration with the Ministry of Domestic Trade and Cost of Living (KPDN), the Ministry of Local Government Development (KPKT), the Ministry of Entrepreneur and Cooperatives Development, and the Malaysia Co-operative Societies Commission (SKM).
The CCOB Task Force will transform into a statutory body, CCOB, once the Consumer Credit Bill is enacted into law to be the Consumer Credit Act.
The transformation of the consumer credit regulatory landscape will be completed in three phases as a way to facilitate a smooth transition and minimise any unintended disruptions in the consumer credit industry while enabling CCOB to enhance its capability and capacity to assume greater responsibilities over time.
The task force said under Phase 1 (2023-2024) upon the enactment of the CCA, existing ministries and agencies such as Bank Negara Malaysia (BNM), the SC, SKM, KPDNHEP, and KPKT will continue to serve as the regulatory and supervisory authorities (RSAs) for their respective sectors.
It said CCOB will be the competent authority overseeing credit providers and credit service providers that are currently unregulated by any authority.
“The CCA will have enabling provisions for CCOB to issue guidelines which could be similarly adopted and enforced by the relevant RSAs on its regulated entities,” it said.
Under Phase 1, the Hire-Purchase Act (HPA) will also be amended or repealed with the relevant provisions to be included in the CCA and KPDNHEP, as an RSA, will continue to oversee the activities of non-bank hire-purchase companies, repossession agents and credit sales providers.
It said the CCA will also facilitate Islamic credit business by non-bank credit providers by including provisions to ensure that such credit providers and its product offerings comply with Shariah principles.
KPKT’s regulatory ambit will be expanded to include Islamic financing activities and Islamic pawnbroking activities which are not governed under the Islamic Financial Services Act (Act 759) and the Cooperative Societies Act 1993 (Act 502), while KPDNHEP will oversee non-bank Islamic hire-purchase business.
The existing moneylenders’ and pawnbrokers’ licences obtained under the Moneylenders Act and Pawnbrokers Act respectively, as well as permits issued to individuals for repossession of goods under the Hire-Purchase Act, will remain valid with the enactment of the CCA in Phase 1, it said.
It said the consumer credit activities by banks will remain under the oversight of BNM under the first phase.
Meanwhile, under Phase 2 spanning from 2025 to 2029, the regulatory functions in respect of consumer credit activities under KPDNHEP and KPKT will be transferred to CCOB, while BNM, the SC and SKM will continue to act as the RSAs for the entities under their respective purview.
The Moneylenders Act, the Pawnbrokers Act as well as provisions relating to credit sales transactions under the Consumer Protection Act will be repealed and all relevant provisions will be retained and subsumed under the amended CCA.
For Phase 3 spanning from 2030 onwards, the financial industry’s regulatory architecture in Malaysia is envisioned to evolve towards the Twin Peaks model of financial regulation, which separates financial regulation into two broad functions: market conduct regulation (which includes credit consumer protection) and prudential regulation.
The scope of CP2 covers, among others, proposed key licensing requirements. These include minimum financial requirements, governance and Shariah requirements for Islamic credit businesses.
It also sets out professional conduct and responsible lending standards that must be met by potential licensees.
For instance, under the CP2 proposal, an entity carrying out multiple credit businesses will be required to apply for licence or registration from CCOB for each type of credit business or credit service business that falls under the scope of the CCA.
In Phase 1, before the transfer of regulatory powers from KPKT and KPDN to CCOB, entities wishing to carry out businesses such as money lending or pawnbroking are still expected to seek a licence from the respective regulatory authorities.
Affordability assessment and fair debt collection
Under the proposal, all non-bank credit providers are expected to undertake affordability assessment when giving credit to individuals. They must ensure that borrowers have the ability to commit to future payments, taking into account their income and all current financial obligations.
However, for micro or small enterprises, credit providers and credit service providers should undertake creditworthiness assessment based on the viability of the business and its capability to pay based on income or revenue.
The CCOB Task Force said the CCA will also provide a fair debt collection guidance that needs to be followed by credit providers and credit service providers.
Under the Act, debt collection can only be carried out by the credit providers themselves or registered debt collection agencies.
It said a credit provider must issue an authorisation card to its debt collectors containing detailed information on the credit provider and debt collectors.
Reminder or prior notice needs to be given before collecting debts, which include information on the outstanding debt, payment due date, and contact details of the credit provider.
“Debt collectors must be ethical, professional and reasonable in its conduct. It must not harass, threaten or cause harm to credit consumers, and the like,” it said, adding that the credit provider must remain accountable for any complaints against its debt collectors.
The Act will provide a clear guidance on prohibited business conducts such as deceptive practices or providing information on the nature, terms or prices of products or services which could mislead.
The task force said it is also strictly prohibited to make any attempt to induce by, among others, making or recklessly making a statement or promise which is false and misleading; or dishonestly concealing or providing material facts in an ambiguous manner.
Also prohibited are exerting undue pressure, harassing or threatening to use physical force when products or services are being offered, granted or being paid; and demanding payments for unsolicited products or services including threatening to bring legal proceedings.
“Any person committing these offences could be liable to imprisonment, a fine or both,” according to CP2.
Any aggrieved credit consumer may lodge a complaint against a credit provider or credit service provider via a one-stop complaint management system which will be developed by CCOB.
This portal will be interoperable with the credit provider or credit service provider’s internal complaints handling system which allows the sharing of information, engagement and coordination between CCOB and the respective RSAs on complaints involving multiple regulatory agencies.
Enhancements to hire-purchase act 1967
One of the interesting parts of CP2 is it also covers proposed enhancements to the Hire-Purchase Act 1967 (HPA 1967).
The task force said these enhancements are aimed at modernising the Act and improving consumer outcomes. In particular, the CCOB Task Force is seeking feedback on the proposed removal of Rule 78.
Such rule pre-calculates interest charges on hire purchase contracts as such that more interest is paid in the earlier period of the loan tenure.
According to the task force, the Rule of 78 method is recognised globally to be unfair to borrowers and the practice is prohibited in jurisdictions such as Australia, New Zealand, the United Kingdom (UK), and some states in the United States (US).
The offering of flat rate loans is also prohibited in Australia and New Zealand. In jurisdictions such as the UK and US, the offering of flat rate loans is only permitted where the interest charged is equal to or lower than the interest charged under the reducing balance method.
“This financing method can lead to unfair outcomes for borrowers opting for early settlement. The proposed changes to the HPA 1967 also include the acceptance of digital and electronic signatures for hire purchase agreement processes,” it said.
BNM assistant governor and CCOB Task Force head Abu Hassan Alshari Yahaya said interested parties are invited to provide feedback and comments on the consultation paper to the task force by May 15, 2023, via its website.