Raising consumer credit protection

Raising consumer credit protection

Consumers will be accorded extra protection once a new act is passed that will regulate companies that provide credit or credit services to people. The Consumer Credit Act (CCA), drafted jointly by Bank Negara and the Securities Commission (SC), seeks to provide a comprehensive framework for regulating the conduct of entities carrying out the business of providing credit or credit services to such consumers, with an immediate focus on those that are not currently subject to direct regulation by any authority.

“This includes the regulation of new forms of credit such as ‘Buy Now Pay Later’ (BNPL) providers,” both regulators said in a joint-statement yesterday. The CCA is targeted to be tabled in Parliament in the second quarter of 2023. However, there will be a grace period to allow the industry and businesses to make the necessary preparations to comply with the Act.

Bank Negara and the SC said the CCA will pave the way for the establishment of the Consumer Credit Oversight Board (CCOB) as an independent competent authority to oversee consumer credit providers and credit service providers. The public consultation is the first of a two-part consultation. It provides an overview of the current landscape of the consumer credit industry in Malaysia, its challenges and proposed reforms to better protect individuals and small businesses in their dealings with credit providers and credit service providers.

“The reforms will be implemented in phases under a proposed multi-year programme to deliver consistent standards of protection for credit consumers and support the orderly development of the credit industry in Malaysia. The CCA will provide protection to individual consumers, as well as micro and small enterprises (MSEs). The CCA will apply to individuals that obtain credit for personal, domestic and household purposes. There is no credit limit for individuals to receive protection under the CCA.

For MSEs, the CCA applies to those that obtain credit up to RM500,000.

The concept of BNPL essentially allows a person to purchase something now and pay for it after, via a series of instalments. BNPL, as an industry, has been growing rapidly and is expected to grow. Over the years, regulators have been taking various approaches in terms of oversight and regulation, while some are even moving towards imposing regulations on BNPL providers.

In the case of Malaysia, the government feels that more pre-emptive approaches need to be taken, after seeing the growth trends in this segment, the risks and their potential impact on financial customers. Bank Negara and the SC said the CCOB task force will be seeking feedback on the proposed regulatory and authorisation framework, as well as areas that will be addressed in the legislation to promote high standards of professionalism and fair conduct of credit providers and credit service providers.

“This will be followed by part two of the consultation paper, targeted to be issued in the fourth quarter of this year, which will provide further details on authorisation, governance and conduct requirements that will be applied to credit providers and credit service providers.”

The aim of enacting the CCA in phases is to ensure a smooth transition of the Act.

Under Phase 1 (2023 to 2024), the CCA will provide for the need to obtain authorisation from the CCOB for the licensing of credit providers carrying out BNPL, credit factoring or leasing of business. The first phase will also involve the registration of credit service providers engaging in debt collection activities and the buying of impaired loans.

Credit providers that only lend to those not defined as “credit consumers” under the CCA are not subject to licensing requirements, but are required to submit a declaration form to the CCOB to attest and confirm that they do not lend (to credit consumers).

Under Phase 2 (2025 to 2029), the CCA will be reviewed and expanded to include credit activities such as hire purchase, credit sales, moneylenders and pawnbrokers. Under Phase 3 (2030 onwards), the CCA and relevant legislations will be reviewed further to rationalise the conduct, regulation and supervision of all financial service providers.

The CCA, once enacted, will cover key areas such as a redress mechanism; prohibited business conduct; advertisement and solicitation; financing charges; credit assessment; credit agreement; debt collection; and financial hardship relief. Apart from strengthening the protection of credit customers, the move to enact the CCA is also due to the fact that fragmented regulatory frameworks have created an unlevel playing field and regulatory disparity between different providers.

A major concern over the current credit landscape at the moment is that there are differences in standards applied to credit providers and inconsistent level of protection for consumers. It has also been argued that there is an absence of a dedicated redress mechanism for all classes of affected consumers, which cuts across the consumer credit industry. The absence of a regulatory framework for unregulated players in the consumer credit industry has also led to unfair practices that often target vulnerable households and small businesses.