4th October 2022 - 12 min read
As consumers, you would definitely be familiar with credit cards, personal loans, hire purchase agreements (better known as vehicle loans), and mortgages (better known as home loans). These are also referred to as consumer credit.
However, the consumer credit market spans beyond just loans that you can apply from banks, and with the rise of fintech, new forms of credit lines have emerged. Take for instance, the latest credit offering that has been gaining traction among consumers: buy-now-pay-later (BNPL) services, which became popular during Covid-19 due to its easy approval process and flexibility, at a time when people needed urgent help with cash flow.
Given the growing diversity in the consumer credit landscape, Malaysia’s existing financial regulatory framework needed to be urgently updated so that it is comprehensive enough to provide satisfactory protection to consumers. This is especially true for those who are vulnerable and less financially savvy.
This is why the Consumer Credit Act (CCA) is extremely important to all Malaysians. First proposed by Bank Negara (BNM) back in 2017, the Act seeks to protect consumers in their dealings with creditors and to promote healthy spending, and BNM is resuming its push for its enactment, with the most recent activity being the publication of its consultation paper (Part 1). In this article, we’ll dive into key details about the CCA, and share examples to demonstrate why this Act is important – far beyond regulating BNPL players.
Currently, the regulatory framework for Malaysia’s consumer credit industry is quite fragmented, with different credit activities falling under the purview of different ministries and legislations. Here’s a table to quickly summarise the existing legislations:
|– Hire Purchase Act 1967|
– Consumer Protection Act 1999 (including the Consumer Protection (Credit Sale) Regulations 2017)
|Ministry of Trade and Consumer Affairs (KPDNHEP)|
|– Moneylenders Act 1951|
– Pawnbrokers Act 1972
|Ministry of Housing and Local Government (KPKT)|
|Cooperative Societies Act 1993||Administered by Malaysia Co-operative Societies Commission (SKM), under the Ministry of Entrepreneur and Cooperatives Development (KUSKOP)|
|– Financial Services Act 2013|
– Islamic Financial Services Act 2013
– Development Financial Institutions Act 2002
|Administered by Bank Negara Malaysia (BNM), under the Ministry of Finance (MOF)|
|Capital Markets and Services Act 2007||Administered by Securities Commission Malaysia (SC), under the Ministry of Finance (MOF)|
As you can expect, each legislation and ministry will have different standards and procedures, which ultimately leads to “uneven standards of protection” for consumers when they obtain credit assistance from different providers of consumer credit.
Even more concerning is the fact that there are many non-bank entities offering credit facilities or related services these days – many of whom do not fall under the purview of any ministries/agencies listed above. With the enactment of the CCA, it is hoped that these concerns will be addressed.
Malaysia’s drafting of the CCA is inspired by similar work that has been done in several other nations thus far to improve their consumer credit landscapes. These include the United Kingdom’s Consumer Credit Act of 1974, as well as more recent ones, such as New Zealand (Credit Contracts and Consumer Finance Act 2003), South Africa (National Credit Act No. 34 of 2005), and Australia (National Consumer Credit Protection Act 2009).
Once enacted, the CCA is expected to pave the way for the “modernisation of the consumer credit regime in Malaysia”, protecting credit consumers from unfair and deceptive market practices. Chief of all, it will allow for the establishment of a framework for entities that provide credit and credit services (including non-bank entities), along with a consistent blueprint for credit consumer protection.
The CCA will also guide the collaborative efforts between all relevant ministries and agencies in enforcing the new standards and regulations. Ultimately, this should lead to the development of an organised consumer credit landscape.
Driving these reforms under the CCA will be the new independent authority body dubbed the Consumer Credit Oversight Board (CCOB). There will also be a separate Council for Consumer Credit Malaysia (CCC), which serves as a platform where the CCOB – as the key entity spearheading the effort – and existing ministries or agencies can come together to coordinate efforts and discuss key areas of concerns.
Meanwhile, in terms of timeline, the implementation of the CCA and the transformation of Malaysia’s consumer credit landscape is expected to take place gradually in three phases:
|Phases||Approximate dates/Timeline||Phased implementation|
|Phase 1||Upon enactment of CCA||– CCOB to oversee all currently unregulated credit providers and credit service providers|
– Existing ministries and agencies to continue regulating their respective sectors for now. However, CCOB may issue standards that can be adopted and enforced by the ministries and agencies.
– Provisions to facilitate Islamic credit business by non-bank credit providers, such as ensuring that these businesses and their products comply with shariah principles
– Existing licences/permits for moneylenders, pawnbrokers, and repossession of goods (under the Hire Purchase Act 1967) that were issued under current legislations remain valid
– Hire Purchase Act 1967 to be updated for relevance
|Phase 2||By 2025 or after||– KPDNHEP and KPKT to gradually transfer its consumer credit regulatory functions to the CCOB|
– The Moneylenders Act 1951, the Pawnbrokers Act 1972, and provisions relating to credit sales transactions under the Consumer Protection Act 1999 will be repealed
– CCA will be amended to support the repeal of the three legislations above
|Phase 3||After 2030||– Enhancements to the existing regulatory framework can be considered, including proposals drawn from the experience of “twin peaks” approach* to financial regulation |
* The “twin peaks” approach basically employs two regulators to safeguard the financial system: one responsible for prudential and conduct regulation, while the other supervises financial services
Now that you’re aware of the general objectives behind the CCA, we’ll delve a little deeper into the nitty-gritty of the Act. Who does it actually protect, what businesses does it cover, and what exact areas does it protect consumers against? Let’s find out.
1) Who does the CCA protect?
The CCA consultation paper (Part 1) was unambiguous in noting that it is “not intended to protect all consumers”. Rather, it seeks to focus on those who are “most vulnerable, less resilient, and lack bargaining power when dealing with credit providers”.
Under this distinction, the CCA will therefore cover not just individual consumers, but also micro as well as small and medium enterprises (SMEs and MSMEs). Specifically, you will be protected by the CCA if you fall into any of these categories:
|Individuals||When you obtain, have obtained, or intend to obtain credit for personal, domestic, or household purposes (unlimited amount)|
|SMEs & MSMEs||When you obtain, have obtained, or intend to obtain credit less than RM500,000|
|Guarantors||When you act as a guarantor for individuals/businesses obtaining credit (in the two categories above)|
|Others||Any other person or class that may be prescribed by the minister|
2) Who will the CCA apply to?
Overall, the CCA will apply to any entities that serve as credit providers or credit service providers. Depending on which category your business falls into, you’ll be required to either obtain a licence under the CCA when it comes into effect, or register your business.
Under Phase 1 of implementation, the CCA will concern these following entities:
|Categories||Definition/Distinction||Businesses/Entities||Form of regulation under the CCA|
|Credit providers||Entities/businesses that are directly providing credit to consumers||– Buy-now-pay-later (BNPL)|
|Credit service providers||– Typically third-party entities/businesses that are used by credit providers to perform servicing activities|
– Does not provide credit directly to consumers
|– Impaired loan buyers (ILB)|
– Debt collection agencies (DCA)
Under Phase 2 of implementation, these additional entities will also join the initial five businesses mentioned in the table above to fall under the purview of the CCA:
Meanwhile, credit providers serving customers who do not fall under the definition of “credit consumer” under the CCA are required to provide legal acknowledgement to the CCOB. They must state that their business model does not include activities extended to credit consumers as defined by the CCA. Additionally, they must include a commitment to pursue authorisation from the CCOB if/when their circumstances change.
3) What areas does the CCA cover?
The CCA consultation paper noted that very frequently, credit consumer harm (as defined by the CCA) is caused by irresponsible or unethical practices on the part of credit providers and credit service providers. Common examples of these include inadequate affordability assessments, use of complex and ambiguous terms in credit contracts, and not displaying important terms or conditions prominently.
As such, the CCA has been designed to offer consumer protection in eight key areas, namely:
|Credit consumer protection areas||Objectives|
|Prohibited business conduct||Credit providers should act fairly or ethically, and should not mislead and deceive consumers|
|Advertisement & solicitation||– Promotional materials must be accurate, clear, and not misleading|
– Crucial conditions and information must be prominently displayed
|Credit agreement||Adequate information is disclosed, and contract terms are fair|
|Financing charges||Charges set must be reasonable and are transparent (e.g. consequences of late payments or defaults)|
|Credit assessment||Be responsible in assessing credit consumers’ capability in taking credit|
|Debt collection and repossession of goods||Provide adequate notices and avoid harassment or violence during debt recovery process|
|Financial hardship relief||– Identify credit consumers who are genuinely facing financial hardships and are unable to meet financial obligations|
– Provide such credit consumers with fair opportunity to restructure their credit agreements, or alternative solutions
|Redress mechanism||Set up an avenue for complaint management|
While it’s helpful to understand the technicalities that underpin the CCA, it’s even more critical for credit consumers to recognise how the Act can protect them in real-life situations. Knowing this, BNM has highlighted two scenarios in its consultation paper to demonstrate the CCA’s role; here’s an abbreviated version of the case studies for your reference:
|Scenario||The CCA’s role|
(Credit consumer and BNPL)
|Prior to the start of Covid-19, Kak Tini – who owns a home-based business selling assorted baked items – bought various baking accessories through multiple BNPL providers. Paying interest-free instalment in small amounts had made all her purchases seem cheaper. |
During the pandemic, however, Kak Tini’s business was badly affected, and she now struggles to pay the mounting instalment bills. Kak Tini is also incurring late payment charges and processing fees.
Kak Tini admits that she is not digitally nor financially savvy, and in her haste for instant credit, she simply agreed to the terms set by BNPL providers. She is also unable to reach the BNPL providers despite calling repeatedly, and is unsure how she can go about lodging a complaint or seeking help.
|While BNPL can be a useful avenue for credit consumers to manage their short-term cash flows, it also poses certain risks – including inculcating a false sense of affordability that may lead to future financial hardship. |
While the CCA does not prohibit credit consumers from using multiple BNPLs, there will be requirements on the BNPL providers to adopt responsible lending practices, such as performing adequate assessments on its customers prior to offering a BNPL facility. This way, BNPL providers will ensure that they are only extending their services to those who are able to repay.
The CCA will also set expectations for credit providers to handle credit consumer complaints and disputes in a timely and effective manner.
(Intimidating debt collector)
|Mr John, who owns a mechanic workshop, took on a loan of RM50,000 from a licensed credit provider to expand his workshop. However, flash floods damaged his workshop, and Mr John had to use his savings to repair these damages. This consequently caused him to fall behind on his monthly repayments. |
Soon after, Mr John is approached by debt collectors from a debt collection agency (DCA), appointed by the licensed credit provider to recover his debts. The initial meetings were cordial, with the debt collector patiently advising him.
However, when Mr John continued to miss repayments, the debt collector began making harassing phone calls and leaving threatening notices. The situation worsened when the debt collector started calling Mr John’s elderly mother, forcing her to pawn her jewelleries and family heirlooms to settle the debts.
|While BNM has put standards and regulations in place for banks to ensure fair and professional conduct, DCAs are currently not regulated directly by any authorities. |
Unregulated non-bank credit providers are also not subjected to similar obligations to ensure that their appointed DCAs treat customers fairly and respectfully.
The enactment of the CCA will put DCAs under the purview of the CCOB. As a registered entity, DCAs will be required to adhere to ethical and professional standards of conduct in all their dealings. Otherwise, DCAs can be penalised for breaches of conduct obligations imposed on them.
As you can see, the enactment of the CCA is a pivotal step in strengthening the consumer credit protection framework in Malaysia. As an intelligent credit consumer, knowing your rights – as provided under the CCA – will enable you to stand up for yourself and ensure that your interests are fairly and consistently safeguarded.
The CCA consultation paper that has been made available thus far is only Part 1 of a more extensive document. Part 2 – which is expected to set out the authorisation requirements and the standards of conduct of participants – is slated to be issued in the fourth quarter of 2022. Members of the public are also encouraged to share their feedback on the matter.
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