InTheKnow: What is the Consumer Credit Act? | So Good News
When the Consumer Credit Act (CCA) was mentioned in the news last year, it was in relation to the come-now, pay-later (BNPL) scheme, which would encourage consumers to unknowingly run into credit.
Working with merchants, BNPL companies allow consumers to convert payments into smaller installments without charging them any interest. Instead, attention is given to entrepreneurs. This solution came as a relief to consumers who had limited funds during the pandemic.
It was reported, however, that BNPL companies were repaying loans to consumers but did not fall under the authorities, including Bank Negara Malaysia. It was clear that new laws would be needed to regulate such companies.
On Aug 4, the first part of the public consultation paper on CCA was published. It was organized by the Consumer Credit Oversight Board Task Force, with the support of the Ministry of Finance (MoF), Bank Negara and the Securities Commission Malaysia (SC).
As expected, BNPL was mentioned in the interview paper because of its rapid growth and lack of regulations. But other unregulated players were also named, including non-banking and lending companies, bad debt buyers and debt collection agencies.
The discussion paper suggests that the CCA aims to tackle bigger challenges than simply regulating the players of BNPL and other non-banking institutions that are not controlled by consumers.
Control units are fragmented and there is an inconsistent level of security
In the big picture, the CCA aims to tackle the regulatory divisions that are divided into consumer credit sectors, which include four ministries and two regulators that manage the business in different ways. According to the discussion paper, they are:
1) Ministry of Domestic Trade and Consumer Affairs (KPDNHEP), with the Hire Purchase Act 1967 (also known as Act 212) and the Consumer Protection Act 1999 (Act 599), which includes the Consumer Protection (Credit Sale) Regulations 2017.
2) Ministry of Housing and Local Government (KPKT), and the Moneylenders Act 1951 (Act 400) and Pawnbrokers Act 1972 (Act 81).
3) Ministry of Entrepreneur Development and Cooperatives (Kuskop), with the Co-operative Societies Act 1993 (Act 502), which is administered by the Malaysian Co-operative Societies Commission (SKM).
4) Bank Negara, which is under the MoF, and Financial Services Act 2013 (Act 758), Islamic Financial Services Act 2013 (Act 759) and Development Financial Institutions Act 2002 (Act 618).
5) SC, which is also under MoF, and Capital Markets and Services Act 2007 (Act 671).
The discussion paper emphasizes that the provisions and requirements under several laws are not always consistent, which leads to “wide differences in the standards applied to credit providers” and “inconsistent protection for consumers”. It also suggests that consumers who deal with unregulated players are more likely to face “abusive practices” compared to more regulated lenders such as banks.
Financial consumers, like bank customers, can turn to the Ombudsman for Financial Services for redress, it adds. Investors in capital markets, such as stockholders, can refer to the Securities Industry Dispute Resolution Center (SIDEC). But non-bank consumer loan providers don’t have a dedicated repayment system.
Although financial technology (fintech) has made credit cheaper and more accessible to people, it is a concern that credit services are targeting consumers who are at risk, have less money and are less confident. They are often vulnerable families and small or medium-sized businesses.
Consumer Credit Oversight Board
This is the case when the discussion paper suggests the creation of the Consumer Credit Oversight Board (CCOB), an independent organization that will gradually take a major role in the management of all areas of consumer credit and financial management.
While the existing ministries and agencies will continue to manage their sectors according to their own laws, the CCOB will fulfill their responsibility to monitor and ensure that their agencies also comply with the new CCA rules.
When the CCA is established, it will seek to establish a framework for licensing non-banking institutions engaged in the business of lending and credit. The new law also aims to provide a complete and consistent policy for the protection of credit consumers and establish a monitoring, monitoring and enforcement system to prevent and criticize unfair, inappropriate and abusive practices.
Meanwhile, the Council for Consumer Credit Malaysia will be established to ensure cooperation between relevant ministries and agencies. It will be chaired by an executive chairman of the CCOB, members consisting of officials from the MoF and other relevant ministries and agencies.
The discussion paper proposes that the CCOB be implemented in three phases.
In the first phase, the CCOB will be the regulatory authority for credit providers and credit service providers that are not currently regulated by all authorities. The existing ministries and agencies will continue to manage their sectors.
In the second phase, by the year 2025, the management functions of consumer credit under KPDNHEP and KPKT will be transferred to CCOB, while Bank Negara, SC and SKM will continue to manage the respective institutions.
The third phase will be after 2030, where in the next five to ten years, the existing interest rates for managing the financial system in Malaysia will be considered. The CCOB will be established as a digital-based regulator, supporting proven technology solutions such as big data and artificial intelligence, according to the application paper.
Loan buyers include small and medium businesses
The discussion paper defines loan buyers as, among others, people who have received, have received or want to receive a loan from a lender, wholly or mainly for personal, domestic or household purposes.
Interestingly, loan buyers include small or micro-business owners who obtain, have received or intend to receive a loan of up to RM500,000 from a loan provider. The RM500,000 threshold would cover about 70% of existing SME loans.
The discussion paper lists the organizations that can be managed by the CCA. Those who provide loans directly to loan buyers will be licensed under the new law, while those who provide services to loan providers or loan buyers must register.
In the first phase, BNPL, manufacturing and lending institutions will need to be licensed by the CCOB, while distressed debt buyers and debt collection agencies will need to register.
In the second phase, conventional and Islamic lenders, lenders and non-banking brokers and loan companies will be supervised by the CCOB. This is in line with the transfer of regulatory powers from KPKT and KPDNHEP to CCOB.
Following the release of the discussion paper, the Consumer Credit Oversight Board Task Force will hold panel discussions and discussions with industry players and stakeholders in September and October.
The details of the accreditation requirements and ethical standards will be explained in the second part of the discussion paper, which is expected to be presented in the fourth part of this year.