On 4 August 2022, the Consumer Credit Oversight Task Force (“Task Force”) issued the first of a two-part consultation paper (“Consultation Paper”) to seek public feedback by 5 September 2022 on a proposed regulatory framework dealing with credit providers and credit service providers.
The Task Force, under the purview of the Ministry of Finance, was established to drive the finalisation of the Consumer Credit Bill (“Bill”). Once the Bill is passed and enacted as the Consumer Credit Act (“CCA”), the Task Force will be formally established as the Consumer Credit Oversight Board (“CCOB”). The CCOB is intended to be the regulatory authority for consumer credit business and will complement the role of existing regulators such as Bank Negara Malaysia (“BNM”) - the Central Bank of Malaysia - and the Ministry of Domestic Trade and Consumer Affairs (“MDTCA”).
This Alert sets out the key points of the proposed regulatory framework to be introduced by the CCA as set out in Part I of the Consultation Paper.
The Consultation Paper introduces, inter alia:
- a three-phase approach to a unified consumer credit regulation framework in Malaysia
- the concept of “credit consumer” which includes individuals and certain MSEs
- an authorisation regime for non-bank entities carrying on the business of providing credit and credit services
- a credit consumer protection framework
The rapid growth of Buy Now Pay Later (“BNPL”) schemes on the back of rising e-commerce and digital payments penetration has stirred concern among regulators as there is currently no specific framework in place governing such schemes.
In addition, consumer credit activities in Malaysia are governed under multiple pieces of legislation such as the Hire-Purchase Act 1967, the Consumer Protection Act 1999, the Moneylenders Act 1951 and the Financial Services Act 2013, with responsibility for oversight of the relevant players spread across different regulatory and supervisory authorities (“RSAs”).
The new framework to be introduced by the CCA is aimed at addressing the increasing number of unregulated players in the consumer credit space and to unify and consolidate the fragmented regulatory frameworks in the consumer credit landscape.
It is hoped that unifying the frameworks will also resolve issues such as significant differences in standards applied across credit providers and the absence of a comprehensive redress mechanism body that allows consumers to seek redress against consumer credit providers.
Proposed approach to consumer credit regulation in Malaysia
Among other things, Part I of the Consultation Paper sets out proposals to:
- establish an authorisation framework for non-bank entities carrying on the business of providing credit and credit services;
- provide a framework for credit consumer protection through the imposition of minimum standards of conduct on credit providers and credit service providers;
- establish a surveillance, supervision and enforcement framework to deter and reprimand unfair, unethical and predatory practices;
- establish the CCOB as a new independent competent authority for consumer credit business; and
- establish a high-level Council for Consumer Credit Malaysia to ensure effective coordination among existing RSAs currently overseeing consumer credit activities.
Coverage and applicability
Definition of “credit consumer” to include individuals and MSEs
Under the CCA, a person who will be accorded protection, whether in relation to conventional or Shariah-based financing, is described as a “credit consumer”.
A credit consumer will include inter alia:
- an individual who obtains credit from a credit provider, wholly or predominantly for personal, domestic or household purposes;
- micro or small enterprise (“MSE”) who obtains credit from a credit provider, not exceeding an amount of RM500,000; and
- an individual who acts as a guarantor, not for the purpose of making profit, to a credit consumer in respect of a credit agreement to which the CCA applies.
It is expected that the threshold of RM500,000 in respect of MSEs would cover almost 70% of current SME loans.
Non-application of the CCA
The CCA would not apply in circumstances where:
- the provision of credit or services are incidental and not the entity’s “core business” (such as employers giving loans to staff); or
- the credit or services are offered by government-linked entities.
Business entities to be regulated
Entities which would be regulated under the CCA include:
- Entities directly providing credit to credit consumers such as entities providing BNPL services or carrying on factoring or leasing business, which will be required to be licensed under the CCA; and
- Entities providing services to credit providers/consumers such as impaired loan buyers and debt collection agencies, which will be required to be registered under the CCA.
Credit providers which only serve a niche market of consumers that do not fall within the definition of “credit consumer” will not be required to be licensed or registered under the CCA. Instead, such credit providers will be required to provide an attestation to the CCOB that their restricted business model does not include activities extended to “credit consumers”.
Credit consumer protection areas
The proposed key areas in relation to credit consumer protection which would be covered under the CCA include requirements relating to:
- prohibited business conduct;
- advertisement and solicitation;
- credit agreement;
- financing charges;
- credit assessment;
- debt collection and repossession of goods; and
- relief from financial hardship.
Detailed proposals in relation to the above have not, however, been set out in Part I of the Consultation Paper.
The transformation of the regulatory landscape is expected to be completed in three phases.
Phase 1: Upon enactment of the CCA
Phase 1 will commence upon the enactment of the CCA.
The CCOB will regulate any credit providers and credit service providers that are currently unregulated by any RSA. Existing RSAs such as BNM and MDTCA will continue to oversee their respective sectors under Phase 1.
The CCA will include provisions that allow the CCOB to issue standards which could be adopted and enforced by the relevant RSAs.
Further, the Hire-Purchase Act 1967 will be updated to include a review of prescriptive rules which are outdated or which may not protect consumers’ best interests.
Phase 2: By 2025
Phase 2 is to be entered into by 2025 and will see the transfer of regulatory functions involving consumer credit activities from MDTCA and the Ministry of Housing and Local Government (“KPKT”) to the CCOB. Entities such as conventional and Islamic moneylenders, pawnbrokers, and non-bank hire purchase and credit sales companies are expected to come under the regulatory ambit of the CCOB.
The Moneylenders Act 1951, Pawnbrokers Act 1972, and parts of the Consumer Protection Act 1999 relating to credit sale transactions (collectively, “Acts”) will be repealed. The CCA will be amended to incorporate relevant provisions of the Acts under an amalgamated law.
Phase 3: After 2030
Phase 3 is only to be entered into after 2030, with the eventual aim of having two distinct and separate authorities responsible for prudential regulation and supervision of market conduct in the financial services.
Part 2 of the Consultation Paper will be issued in the fourth quarter of 2022 and is expected to outline further details on the proposed authorisation regime and requirements and standards that will be applicable to credit providers and credit service providers.
This article has been prepared with the assistance of Associate Kimberly Lim Ming Ying and Legal Executive Aniq Ikhwan bin Ishak.