Overview of the Second Paper
The Second Paper continues to envisage a phased implementation approach for the CCA, which is targeted for tabling to Parliament and to be enacted in the fourth quarter of 2023. The Second Paper also contemplates a grace period of six months for the industry to comply with the CCA requirements once the CCA is in force.
The Second Paper elaborates on the proposed requirements under the CCA which were introduced in the First Paper and is structured into two broad sections:
- Section 1 sets out the proposed regulatory requirements applicable to credit providers and credit service providers (together, "Providers"), particularly authorisation, governance and conduct requirements.
- Section 2 details the proposals for enhancing the existing framework on hire purchase financing.
A summary of some of the key provisions in the Second Paper is set out below.
Section 1: New Regulatory Requirements applicable to providers
The concept of an authorisation regime has been retained in the Second Paper, which subjects non-bank entities to a potential licensing and/or registration requirement with the CCOB, depending on the nature of its business.
The authorisation will be a one-off process i.e., the licence or registration granted will not be subject to a renewal process and will continue to be valid unless revoked, suspended, de-registered etc. The licence or registration cannot be transferred, sold or leased; and any proposed amalgamation or merger of a Provider's business with any other person will require prior approval from the CCOB or the relevant regulatory and supervisory authority (RSA).
Notably, the Second Paper requires all Providers to be locally incorporated as a company limited by shares. In line with the CCA's intent as an overarching legislation for all Providers which adopts a principle-based and outcome-focused approach, the Second Paper also sets out broad principles relating to a Provider's organisational requirements - for example having: (a) clear lines of responsibility of authority; (b) sufficient, and appropriately experienced and skilled, human resources; (c) appropriate operational procedures and internal controls in place; and (d) policies and procedures on areas such as risk management, conflict management, anti-corruption, whistleblowing, complaints management and compliance.
Minimum financial requirements
The Task Force has undertaken a benchmarking exercise against minimum financial requirements set by other regulators. The financial requirements range from having shareholders' funds of RM 250,000 (for debt collection and debt counselling providers) to RM 2 million for the other categories of business (e.g., buy-now pay-later, and factoring and leasing businesses). On an annual basis, the board of a Provider is also required to submit a written undertaking or confirmation that the credit business or credit service business has adequate financial resources for the next 12 months.
Providers will be subject to certain reporting obligations e.g., as it relates to the material changes to the Provider's operations; appointment and re-appointment of the CEO, directors and senior management; and reports relating to its ongoing operations.
Business conduct and credit consumer protection requirements
The Second Paper brings the requirements applicable to Providers in line with many of the requirements which already apply to existing regulated financial institutions. This includes specifications relating to prohibited business conduct; the use of advertising and promotional materials; transparency and disclosure of information to credit consumers; the fairness of terms in a credit agreement to credit consumers; the parameters around the imposition of fees, charges, profit and interest; the need for credit providers to conduct an affordability assessment on a credit consumer and how to discharge this obligation; and complaints handling.
Section 2: Changes to the Hire Purchase Framework
In the interest of updating the Hire-Purchase Act 1967 (HPA) to address prescriptive rules that are outdated or which may not serve the best interests of consumers, the Second Paper is currently proposing two key enhancements aimed at modernising the HPA and improving consumer outcomes - namely:
- Removal of Rule of 78: the HPA currently requires the Rule of 78 method to be used by hire purchase providers offering flat rate loans. The effect of the Rule of 78 is that interest charges are pre-calculated on hire-purchase contracts such that more interest is paid in the earlier period of the loan tenure, which may be perceived as unfair to borrowers - particularly those for opt for early settlement. The Rule of 78 will be removed and replaced by a new formula.
- Use of digital and electronic signatures, and electronic notices: the Second Paper also proposes that hire-purchase providers should be permitted to adopt technologies to accept: (i) digital signatures to execute hire purchase agreements; and (ii) electronic signatures for a variation of agreements. In line with this, hire purchase providers will also have the flexibility to service notices through electronic channels for faster delivery of important updates to borrowers.
Conclusion and next steps
The Task Force is inviting feedback on specific issues raised in the Second Paper. In light of the detailed elaborations in the Second Paper, interested participants and industry players should continue to consider how the CCA will impact their existing business models and also take the opportunity to provide the Task Force with its views and feedback.
Although a grace period of six months will be implemented, industry players should also begin to enhance their systems and procedures to ensure that it will be able to meet the CCA requirements when it comes into force. For Providers seeking to submit an application for authorisation, they should begin to compile the relevant information and prepare for the meetings with the CCOB in advance of the submission.
Consistent with the First Paper, the Second Paper further reinforces the CCA's intent towards ensuring consistent regulatory treatment of players in the consumer credit space and brings various standards in line with many of the requirements which existing regulated financial institutions are already required to comply with.
* * * * *
This client alert was issued by Wong & Partners, a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.