Development of Consumer Credit Laws in Malaysia

• Author: Ahmad Saufi Abdul Rahman
• Position: University of Malaya
• Pages: 68-75

A version of this paper was published in Kierkegaard, S. (2006) Business Law and Technology Vol.2 and presented in the 2006 IBLT Conference , Denmark.

Page 68

1. Introduction

The cost of living increases yearly, necessitating a need to borrow money for some sectors of the society. The affected sectors normally comprise the lower and middle classes of the society. They need to, at least, enter into hire-purchase transactions especially for purchasing motorcars or motorcycles. However, there are others who may go to the extent of acquiring some instant cash from a moneylender or a pawnbroker. Although the services provided by lenders do help the borrowers to temporarily solve their financial problems, there is an urgent need to impose safeguards for such transactions and protect the borrowers. There are lenders who take advantage of the borrowers, who are in dire and desperate need. This situation had made the enhancement of protection via consumer credit laws inevitable.

The legislature in Malaysia had recently reacted to such demands by amending statutory provisions regarding consumer credit. The main amendments involved the Pawnbroker Act 1972 (Act 81) and the Moneylender Act 1951 (Act 400). The amendments were made to strengthen the regulation and control for both transactions by way of licensing, powers of law enforcement and also the law regarding evidence in trial. There is also an amendment made to the Hire-Purchase Act 1967 (Act 212) in relation to variable term charges. The amendment in the Hire-Purchase Act had provided an alternative to the consumer and also the owner as to how the term charges will be calculated during hire-purchase period. The recent amendments had somehow enhanced the protection and also flexibility of consumer credit law.

2. The Element of Consumer and the Credit

In consumer credit transactions, it is important to define the term "consumer." Both the Moneylender Act and the Pawnbroker Act are silent on what the term "consumer" means. The Hire-Purchase Act 1967 also does not give a definition of the word "consumer", but it provides the definition of the word "consumer goods". Under section 2 of Hire-Purchase Act 1967 "consumer goods" is defined as goods purchased for personal, family or household purposes. The definition may sound simple, but in reality, it poses difficulties in distinguishing the intention of the person, especially when the person buys the goods for personal, family or household purposes but later uses it for business purposes. Probably we should refer to another related statutory provision to understand who should be regarded as a consumer. Under the Malaysian Consumer Protection Act 1999 (Act 599), a "consumer" means a person who:

1. Acquires or uses goods or services of a kind ordinarily acquired for personal, domestic or household purpose, use or consumption; and b) Does not acquire or use the goods or services, or hold himself out as acquiring or using the goods or services, primarily for the purpose of - (l) re-supplying them in trade; (ll) consuming them in the course of a manufacturing process; or in the case of goods, repairing or treating, in trade, other goods or fixtures on land.

Page 69

From the definition, it is clear that the Act emphasizes more on the purposes of the goods or services, and the limitations for usages of the goods or services to determine whether the person is within the consumer category. As consumer credit is a part of commercial law, there are others who opine that the law should not distinguish between a person who borrows money for his personal use or for his business because of the difficulty of distinguishing the loan, regardless of whether they are individuals or companies. According to the Committee on Consumer Credit under the Chairmanship of Lord Crowther Cmnd 4596 (1971), the law ought to distinguish between consumer and commercial transactions. The Committee is of the view that the purpose of the loan is an inadequate test, being too vague and subjective. The Committee seems to prefer the approach of excluding bodies corporate from the protection afforded to consumers. This can be achieved by setting a financial limit above which consumers were not entitled to statutory protection (D Rosenthal, 1994, p.4). This view has been applied in the United Kingdom Consumer Credit Act 1974.

However, in Malaysia, such view probably applies only to the Moneylender Act 1951 and the Pawnbroker Act 1972. Both Acts do not distinguish the purpose of the loan, whether it is for personal use or for business purposes. Pawn broking transactions in Malaysia are regulated by way of a loan limit allowed for each transaction. The protection provided by Pawnbroker Act 1972 only applies to pawn broking transaction if the amount of money borrowed does not exceed ten thousand ringgit. For money lending, there is no financial limit for the transaction to be governed by the Moneylender Act 1951. Only the Hire-Purchase Act 1967 still distinguishes between consumer goods and non-consumer goods. The Hire-Purchase Act 1967 applies only to hire-purchase transactions relating to the goods specified in the First Schedule which include all consumer goods and most motor vehicles. The Hire-Purchase (Amendment) Act 1992 had inserted "All consumer goods" to the new First Schedule (P Balan, 1991). The latter stipulates that if the goods are consumer goods, then the transaction will still be governed by the Act no matter how expensive the goods are. The protection given in this aspect is better , in comparison to the setting of a financial limit suggested by the Crowther Committee. This is because by setting a financial limit, problems will arise in determining what would be the amount that limits the protection to the consumers. This is especially relevant in hire-purchase transactions as the prices for the goods to be hire-purchased will rapidly increase within a few years.

The Pawn Broker Act, for example, had increased the financial limit from five thousand to ten thousand Ringgit Malaysia, as it is no longer practical to stay with the previous amount. It is suggested that the protection given by the laws to consumer credit transactions should be a combination of the purposes of the goods and also the financial limit to the transaction. First, it is to give a wider application to transactions involving the consumers for example, by using the word "all consumer goods" as in the Hire-Purchase Act 1967. Second, it is to put a financial limit on transactions that involve goods which do not fall under the definition of consumer goods. By doing so, a wider protection will be given to the consumers. If they enter into a hire-purchase agreement to purchase consumer goods and later unintentionally or accidentally use it for business purposes, the transaction will still be governed by the Hire-Purchase Act. As mentioned earlier, to protect the consumers the definition given to the word "consumer" should be wider or flexible. By giving a strict and rigid definition, it can somehow limit the application of the Act and thus, limit the protection to the consumers.

Another element to be considered when we are talking about consumer credit is the term "credit". This is important since the definition of "credit" can be manipulated. If this happens, then protection by consumer credit legislation may not be applicable to the consumers in cases where the credit is not in terms of cash. Section 9 of the United Kingdom Consumer Credit Act 1974 defines credit as "including a cash loan and any other form of financial accommodation". This is based on the "recognition that the extension of credit in a sale or hire-purchase transaction is in reality a loan and that the reservation of title under a hire- purchase or conditional sale agreement or finance lease is in reality a chattel mortgage...