When the Consumer Credit Act (CCA) was mentioned in the news last year, it was in relation to the emerging trend of buy now, pay later (BNPL), which could encourage consumers to unknowingly chalk up debt.
By working with merchants, BNPL companies let consumers turn payments into smaller instalments without charging them any interest. Instead, the interest is imposed on the merchants. This solution came as a relief to consumers who had tight cash flow during the pandemic.
It was pointed out, however, that BNPL companies were essentially extending loans to consumers but did not fall under the ambit of regulators, including Bank Negara Malaysia. It became clear that new laws would be needed for such companies to be regulated.
On Aug 4, the first part of a public consultation paper on the CCA was published. It was prepared by the Consumer Credit Oversight Board Task Force, with support from the Ministry of Finance (MoF), Bank Negara and the Securities Commission Malaysia (SC).
As expected, BNPL was mentioned in the consultation paper due to its rapid growth and lack of regulations. But other unregulated players were also mentioned, including non-bank factoring and leasing companies, impaired loan buyers and debt collection agencies.
The consultation paper indicates that the CCA aims to tackle bigger issues than just regulating BNPL players and other unregulated non-bank entities in the consumer credit space.
Fragmented regulatory frameworks and uneven level of protection
In the bigger picture, the CCA intends to address the fragmented regulatory frameworks in the consumer credit landscape, which involve four ministries and two regulators that govern the industry under various acts. According to the consultation paper, they are:
1) The Ministry of Domestic Trade and Consumer Affairs (KPDNHEP), with the Hire Purchase Act 1967 (also known as Act 212) and Consumer Protection Act 1999 (Act 599), which includes the Consumer Protection (Credit Sale) Regulations 2017.
2) The Ministry of Housing and Local Government (KPKT), with the Moneylenders Act 1951 (Act 400) and Pawnbrokers Act 1972 (Act 81).
3) The Ministry of Entrepreneur Development and Cooperatives (Kuskop), with the Co-operative Societies Act 1993 (Act 502), which is administered by the Malaysia Co-operative Societies Commission (SKM).
4) Bank Negara, which is under the MoF, with the Financial Services Act 2013 (Act 758), Islamic Financial Services Act 2013 (Act 759) and Development Financial Institutions Act 2002 (Act 618).
5) The SC, which is also under the MoF, with the Capital Markets and Services Act 2007 (Act 671).
The consultation paper stresses that the provisions and requirements under multiple laws are not always aligned, resulting in “significant differences in standards applied to credit providers” and an “uneven level of protection for consumers”. It also points out that financial consumers who deal with unregulated players are more likely to face “exploitative practices” compared with highly regulated credit providers such as banks.
Financial consumers, such as bank customers, can turn to the Ombudsman for Financial Services for redress, it adds. Capital market investors, such as stock investors, can refer to the Securities Industry Dispute Resolution Centre (SIDREC). But consumers of non-bank credit providers have no dedicated avenue for redress.
While financial technology (fintech) has made credit cheaper and more accessible to the public, it is a concern that credit activities are targeting consumers who are vulnerable, financially less savvy and less resilient. They are typically vulnerable households and micro or small enterprises.
Consumer Credit Oversight Board
It is in such a context that the consultation paper suggests the formation of the Consumer Credit Oversight Board (CCOB), an independent authority that would gradually play a bigger role in regulating the overall consumer credit space with a federated regulatory model.
While the existing ministries and agencies continue to regulate their respective sectors in accordance with their own legislation, the CCOB would complement their oversight role and ensure that their regulated entities also comply with the new regulations and standards under the CCA.
The CCA, when enacted, will seek to establish an authorisation framework for non-bank entities carrying on the business of providing credit and credit facilities. The new Act also aims to provide a comprehensive and consistent framework for credit consumer protection and establish an effective surveillance, supervision and enforcement framework to deter and reprimand unfair, unethical and predatory practices.
Meanwhile, the Council for Consumer Credit Malaysia will be set up to ensure effective coordination among the relevant ministries and agencies. It will be chaired by the executive chairman of the CCOB, with members consisting of senior officials from MoF and other relevant ministries and agencies.
The consultation paper proposes that the CCOB be implemented in three phases.
In the first phase, the CCOB will be the authority overseeing credit providers and credit service providers that are currently unregulated by any authority. The existing ministries and agencies will continue to regulate their respective sectors.
In the second phase, by 2025, the regulatory functions in respect of consumer credit activities under KPDNHEP and KPKT will be transferred to the CCOB, while Bank Negara, the SC and SKM will continue to regulate entities under their respective purview.
The third phase will be after 2030, when in the next five to 10 years, further enhancements to existing structures for the conduct regulation of all financial firms in Malaysia will be considered. The CCOB will be established as a digital-based regulator, leveraging proven technology solutions such as big data and artificial intelligence, according to the consultation paper.
Credit consumers include micro and small enterprises
The consultation paper defines credit consumers as, among others, individuals who obtain, have obtained or intend to obtain credit from a credit provider, wholly or predominantly for personal, domestic or household purposes.
Interestingly, credit consumers also include micro or small enterprise owners who obtain, have obtained or intend to obtain credit not exceeding RM500,000 from a credit provider. The RM500,000 threshold would cover almost 70% of the current SME loans.
The consultation paper lists out business entities that would be regulated under the CCA. Those directly providing credit to credit consumers would be licensed under the new Act, while those providing services to credit providers or credit consumers would have to be registered.
In phase one, BNPL, factoring and leasing entities would need to be licensed by the CCOB, while impaired loan buyers and debt collection agencies would have to be registered.
In the second phase, conventional and Islamic moneylenders, pawnbrokers and non-bank hire purchase and credit sales companies would come under the regulatory ambit of the CCOB. This corresponds with the transfer of regulatory power from KPKT and KPDNHEP to the CCOB.
Following the issuance of the consultation paper, the Consumer Credit Oversight Board Task Force will hold focus group discussions and engagement sessions with industry players and relevant stakeholders in September and October.
Further details on the authorisation requirements and conduct standards will be set out in the second part of the consultation paper, expected to be issued in the fourth quarter of this year.