It is confusing to have different laws dealing with different types of consumer credit. Depending on the type of credit facility, it could be under the Pawnbrokers Act, or the Money Lending Act or the Banking and Financial Institutions Act or even the Hire-Purchase Act.
With the uncertain economic times, it is best that consumers avoid signing up for any new credit facilities. They should not be buying any large ticket items like a house or car unless they are very, very sure that their job or business will survive the economic slowdown.
But will Malaysians take heed? Consumers after all spent a total of RM62 billion using credit cards in 2008, or an average of around RM5.2 billion per month.
Banks still expect credit cards to grow albeit at a slower rate. Then there are housing loans and personal loans. There are many other areas of credit that have boomed over the years including cooperatives’ loans, legal and illegal money lending as well as easy payment schemes.
The heart of the matter is that Malaysians have been spending. To fuel this spending, many Malaysians borrowed. And many of the borrowers are defaulting and the situation is likely to get worse in the near future.
Many reasons can be justifiably proposed to explain the burgeoning debt that fuels this apparently unrestrained spending — we could point to government policies, unrelenting advertising, direct and indirect marketing as well as changes in social cultures.
However, part of the problem is also the lack of adequate and consistent laws, regulation and enforcement to deal with consumer credit.
We need laws that will protect borrowers and also reflect the needs of the consumers in the present times. These laws should, for example, ensure that borrowers are given full disclosure before they enter into any credit agreement and that the terms and conditions of the contract are fair to the borrowers. Borrowers who face unexpected hardships like being retrenched should also be able to change their loan repayment schedules.
Consumer credit in the country needs a major revamp because:
- Firstly, it is confusing to have different laws dealing with different types of consumer credit. Depending on the type of credit facility, it could be under the Pawnbrokers Act, or the Money Lending Act or the Banking and Financial Institutions Act or even the Hire-Purchase Act.
- Secondly, the different types of credit facilities are managed by different departments or ministries. For example, hire-purchase comes under the Ministry of Domestic Trade and Consumer Affairs (MDTCA). Money lending and pawn broking come under the Ministry of Housing and Local Government. Loans given by financial institutions come under Bank Negara unless it involves hire-purchase loans which then come under the MDTCA. Consumers have to know which type of credit comes under which Ministry before they can file a complaint.
- Thirdly, all types of consumer credit must be regulated. We have in our midst a very popular type of consumer credit which is not regulated at all. We are referring to the easy payment schemes (often mistaken by consumers as hire-purchase scheme) widely used by outlets like Courts Mammoth, electrical shops and motorcycle shops.
Without regulation, the consumer is at the losing end. For example, since easy payment scheme is unregulated, there is no limit on the interest that can be charged on loans.
A JVC camcorder was advertised in the Courts Mammoth brochure for RM1, 899, can be bought under its easy payment scheme with monthly instalments of RM143 for 24 months i.e. a total of RM3,432. The interest on the loan works out to be an exorbitant 72.26 % per annum.
Bank loans too are unregulated. As such banks are free to dictate the terms of the contract and the helpless borrower has to accept them or forfeit the loan.
In one case where the bank changed the monthly repayment of the loan from RM7,000-10,000, it said that it could do so because under the agreement the loan is “subject to yearly review for increase in repayment amount”. The borrower had a clean record and had never defaulted on any of the RM7, 000 payments.
With the present economic situation we foresee that there will be many who will find it a struggle to meet their housing loan repayments. The bank will not hesitate to auction their homes since all expenses incurred will be borne by the borrowers.
To protect borrowers who are facing genuine financial hardship, from losing their homes, we need regulations whereby under exceptional circumstances, the banks cannot act hastily against borrowers who have defaulted.
- Fourthly, our credit laws often favour the lender over the creditor. We even have a case where an amendment to the law makes the consumer worse off instead of better off.
For example when the amendments to the Pawnbrokers Act 1972 came into effect on 1 January 2004, borrowers found them in a worse situation. This is because one of the amendments allows pawnbrokers to automatically keep the unredeemed pledges if the sum involved is RM200 and below. This means that the borrowers do not have to auction off the pledges whose value is not more than RM200. Borrowers are worse off because previously pawnbrokers could keep the pledges only if the sum involved was RM100 or less.
Therefore there is a need for one comprehensive legislation which will control all aspects of consumer credit under one umbrella, and at the same time, gives a fair deal to consumers. In other words a Consumer Credit Act (CCA).
The necessity for such a piece of legislation was brought to the attention of the Ministry in our memorandum on “The Need for a Consumer Credit Act “in March 2004.
Unfortunately, the feedback we have is that such legislation is unpopular because it would mean that some Ministries /departments will have to give up their powers as all matters pertaining to credit will come only under one Ministry /department.
However if the foremost concern is that of the welfare of credit users, then the CCA must be enacted soonest possible.
As we pointed out in the 2004 memorandum, legislation can be easily drawn up as we have precedents to work with, e.g. UK’s Consumer Credit Act 1974 and New Zealand’s Credit Contracts and Consumer Finance Act 2003.
The ideal Malaysian Consumer Credit Act should follow the New Zealand’s Credit Contracts and Consumer Finance Act 2003, which we find worth emulating. Our recommendations below are found in the New Zealand Act.
The Consumers Protection Act 1999 was finally realised more than a decade after it was first proposed. We cannot wait that long for a Malaysian Consumer Credit Act. To do so would result in financial chaos for consumers.
- All credit (under whatever guises) provided under a contract should come under the Act.
- Have an independent body to supervise and enforce the CCA. This body will have the power to prosecute creditors, power to bring civil proceedings on behalf of consumers and powers to require information or documents.
- Provide a minimum standard for consumer credit, particularly in relation to disclosure and contract terms. The CCA dictates how disclosure must be provided so that all information is expressed clearly and concisely in a way likely to bring it to the borrower’s attention.
- Allow for hardship application. When the borrower suffers an unforeseen hardship (loss of job or sickness) the CCA will allow him to ask for a variation in the consumer credit contract, for example, reducing the monthly instalment. The borrower may apply for a court order to vary the contract if the lender refuses to do so.
- Provide relief against unfair contracts and give consumers the right to cancel contracts under certain conditions.
- Protect consumers by prohibiting unreasonable credit fees.