With these changes, providers offering hire-purchase facilities will need to review, and make the appropriate amendments to the agreements in anticipation of the amendments coming into effect. Existing hirers will also seek to have their arrangements revised, and supplemental or a restatement agreement will need to be prepared.
In more detail
Changes to the interest rate framework
The Bill abolishes the HPA's concept of "base lending rate" (i.e., the minimum interest rate based on owner's cost of funds and other administrative costs), and introduces the "reference rate" (i.e., the benchmark interest rate that forms the basis for determining the pricing of variable rate financing facilities, whereby the benchmark rate is the published prevailing overnight policy rate as determined by the Monetary Policy Committee of BNM) and the "effective interest rate" (EIR) (i.e., a rate which more accurately reflects the actual finance cost of a hire-purchase, whether in the case of a hire-purchase agreement where the terms charges are at a fixed rate or as determined by using the reference rate as a benchmark in the case of a hire-purchase agreement where the terms charges are at a variable rate).
The net effect of this is the removal of the flat rate (a method whereby interest is calculated on the original principal amount for the loan tenure) and the Rule of 78 (a method which effectively requires a hirer to pay more interest in the earlier period of the loan tenure). This brings Malaysia in line with other common law jurisdictions, such as Australia and New Zealand, and also aligns financial service providers across the different verticals (e.g., where licensed banks are prohibited from offering personal financing where the interest/profit charge is computed using the flat rate and/or Rule of 78 method).
Unified computation of early settlement, termination and repossession balances
The Bill also streamlines the calculation of amounts payable in scenarios involving early settlement and termination of a hire-purchase agreement and repossession of goods under a hire-purchase agreement. Previously, the HPA prescribed separate formulas depending on whether the terms charges were at a fixed or variable rate. These provisions, which were part and parcel of the flat rate and Rule 78 concepts, have been replaced.
In their place is a harmonized definition of “net balance due” or “balance outstanding” (i.e., the outstanding amount financed, together with accrued terms charges up to the next payment due date or the date specified in the notice (whichever is later), less any surrender value of the insurance policy associated with the financing). This definition now applies consistently in the event of early settlement, termination and repossession under a hire-purchase agreement.
Recognition of electronic contracts and communications
The Bill modernizes the HPA by expressly recognizing the use and service of hire-purchase agreements and their variations in electronic form. Owners are now permitted to serve such documents electronically, provided the hirer has given written consent to both the use of electronic formats and the effectiveness of electronic service. These changes are similarly consistent with the Paper, which had recommended the use of e-signature technology for hire-purchase providers to serve notices through electronic channels for faster delivery of important updates to borrowers.
Introduction of due diligence obligations
The Bill also introduces a new obligation on owners to undertake reasonable due diligence to verify the identity of the intending hirer before entering into a hire-purchase agreement. Owners are also required to keep records of this due diligence process for at least 7 years from the date of the agreement.
Transitional provisions
For the purposes of early settlement under a hire-purchase agreement, the Bill makes clear that where a hirer and owner has entered into a hire-purchase agreement prior to and which continues to exist after the date of coming into operation of the Bill, such hirer and the owner may mutually agree to elect the method of calculating the net balance due under the hire-purchase agreement in accordance with the principal HPA (as amended by the Bill, once it takes effect).
In this regard, the Bill will only come into effect on a date to be appointed by the Minister of Domestic Trade and Cost of Living ("Minister") by notification in the Gazetted. The transitional period remains uncertain and the Minister will continue to engage with stakeholders, BNM and the Ministry of Finance to determine the coming into force date.
Conclusion and next steps
The Bill represents another step in Malaysia’s broader effort to modernize and harmonize its consumer credit framework, particularly by abolishing the concept of flat rate and Rule of 78 and expressly recognizing electronic communication, and is in line with other regulatory efforts in the industry such as the Consumer Credit Bill and the Personal Financing Policy Document.
With these changes, providers offering hire-purchase facilities will need to review and make the appropriate amendments to the agreements in anticipation of the amendments coming into effect. Existing hirers will also seek to have their arrangements revised and supplemental or a restatement agreement will need to be prepared.
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Yee Sun Tang, Associate, and Raynice Chew, Legal Assistant, have contributed to this legal update.
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