Submission to the Financial Services and the Treasury Bureau in Response to the Public Consultation on Enhancing Regulation of Licensed Money Lenders

1. The Consumer Council (the Council) is pleased to submit its views with respect to the public consultation issued by the Financial Services and the Treasury Bureau (FSTB) on the proposed measures on enhancing the regulation of licensed money lenders.

The Council’s overall views

2. The Council has long been concerned about the impact of consumer over-indebtedness, recognising its serious implications for financial resilience, social equity and economic stability.  The Council released the study “Money Lending – Reforming Law and Trade Practices for Consumer Protection” (the money lending study) in 2019_[1], which amongst other things, recommended lowering the statutory interest rate cap stipulated in the Money Lenders Ordinance (Cap. 163) (MLO), improving market transparency through collecting loan profiles from money lenders and disclosing enforcement statistics, requiring money lenders to conduct prudent credit assessments before granting loans, and strengthening the governance of the industry by consolidating the regulatory functions and handling of complaints.  The Council is pleased to note that many of these recommendations have been taken into consideration and implemented or are being proposed.

3. The Council notes the unrelenting efforts by the FSTB to strengthen consumer protection in money lending  (i.e. enhancing the licensing conditions of money lenders on aspects such as requiring the assessment of the borrower’s affordability, obtaining written consent from loan referees to confirm the referees’ agreement to act as referee, and issuing fair and not misleading money lending advertisements in 2021; and lowering the statutory interest rate caps in 2022), and welcomes the FSTB proposing further measures in the consultation document.  

4. In the following parts, the Council puts forward its views and comments in response to the proposed measures that concern consumer interests, and suggests additional measures to promote responsible borrowing and lending for consideration of the FSTB.

Setting borrowing restrictions on borrowers

5. As stressed in its money lending study, the Council reckons that borrowers have to properly assess their repayment ability and honour loan agreements, while money lenders need to carry out a prudent assessment of borrower’s ability to repay a loan.  The Council considers that imposing borrowing restrictions based on borrowers’ income levels could help mitigate issues such as failure in making repayments, borrowers allegedly absconding after borrowing a huge sum of money, or their referees or employers being harassed, to a certain extent.

6. The Council notes that two approaches, (i) and (ii), on setting a cap on unsecured personal loans based on the borrower’s monthly income have been proposed for selection (paragraphs 18 – 22 of the consultation document), as follows:  

Based on information from the consultation document.

7. As such, the Council opines that the “debt servicing ratio” cap approach would be more desirable and rational from a consumer’s point of view than the “aggregate unsecured personal loan” cap approach, as the “debt servicing ratio” cap approach more directly accounts for the repayment ability of the borrower.

8. The Council is also aware of the possibility that borrowers may face other financial obligations such as repayment for loans made by banks or credit card payments.  The Council suggests that the FSTB should be mindful of these potential debt burden of borrowers when considering the proposed borrowing restrictions. 

9. The Council also notes that as virtual assets are gradually gaining acceptance and popularity, money lenders might also make loans in the form of cryptocurrencies or stablecoins.  The Council suggests the FSTB to take this possibility into consideration and consider how the proposed borrowing restrictions would take this into account to ensure loans are not made to those who cannot afford them.   

10. Ensuring the compliance of money lenders on the loan caps is also crucial.  Clear reminders should be issued to money lenders to observe the loan caps, along with heightened surveillance of their compliance.  To further ensure the observance of the loan caps, the Council suggests the FSTB to consider restricting money lenders to recover debts from borrowers only up to the amount covered by the loan caps and respective interests. 

11. While borrowing restrictions on low-income earners (including foreign domestic helpers, FDHs) might be effective in addressing excessive debt accumulation, the Council also wishes to draw attention to potential side-effects such that measures are taken to mitigate their impact.  For example, borrowers may resort to other means to acquire funds, including lending from unlicensed money lenders or even partaking in illegal acts.  The implementation of the proposed borrowing restrictions should thus go hand-in-hand with tougher measures to keep unlicensed money lenders in check, such as more stringent enforcement, costlier penalties, and exploring ways to block their advertisements, as well as the access to their websites and mobile applications.       

12. Moreover, the Council is concerned that the proposed borrower restrictions may inadvertently impact responsible borrowers who have the intention and ability to repay their loans.  For example, a loan cap may constrain the ability of young people to borrow to fund new businesses, while the proposed restriction on repayment periods, where they shall not be longer than the remaining term of the borrowers’ employment contracts (paragraph 23), is likely to especially affect employees with short-term contracts or gig-workers.  While balancing financial prudence, the Council stresses the need for measures to protect their access to loans and that the FSTB may explore alternative policy approaches that could take into consideration the unique vulnerabilities and circumstances of these groups to prevent them from being unfairly penalised.  Instead of broadbrush restrictions, additional measures may be considered such as tailored affordability assessments that account for the irregular income patterns of gig workers.  At the same time, caution would be required to avoid such additional measures from being potentially abused by money lenders to bypass borrowing restrictions to provide loans to those who cannot afford them.

Strengthening protection of loan referees   

13. The Council notes that under the current regulatory framework, loan referees who provide information about a potential borrower are not liable for repayment of a loan, and thereby might not be essential for loan applications (paragraph 26).  The Council opines that if money lenders can already evaluate the trustworthiness of a potential borrower based on existing credit data information, a referee would not be necessary. 

14. Should the decision be made not to prohibit money lenders from requesting referees, the Council notes there are two proposed options to confirm the authenticity of referees’ consent, namely

• requiring money lenders to proactively send a letter to the referee to ask for written confirmation (paragraph 25 (i)); or
• requiring the written consent to be signed in person at money lenders’ premises  (paragraph 25 (ii)).

15. In particular for the interest of FDH employers, the Council recommends adopting the latter option.  Notwithstanding that the in person approach might cause nuisance to those who were named as referees without their prior knowledge or consent, it would provide greater certainty that the loan referee has truly given consent to becoming a referee.

16. The Council further suggests the FSTB to consider leveraging the capabilities of safe and authentic digital channels, for example iAM Smart, as an additional method to confirm the authenticity of referees’ consent.  This would help strike a balance between providing convenience and ensuring authenticity.

17. In view of the current situation that employers are harassed for their employee’s borrowing (paragraph 23)_[2], the Council also sees a need to strengthen deterrence regarding misuse of referee’s information, for example via tougher penalties on unscrupulous money lenders or debt collectors.

Optimising borrowers’ affordability assessment

18. The Council welcomes the proposal to require all money lenders to regularly submit personal credit information of their borrowers to the Credit Data Smart (CDS) (paragraph 30), which aligns with the Council’s suggestions in the money lending study.  The Council recommends the mandatory collection of consumer credit data which would be put into a central data repository (i.e. CDS) for sharing amongst relevant stakeholders, which would facilitate money lenders to carry out prudent credit assessment.    

19. Meanwhile, loan applicants should be informed that their information would be submitted by money lenders to the CDS.  Drawing reference from similar arrangements in Singapore_[3], the Council opines that money lenders must inform loan applicants in writing, and also explain the purpose of such submission, and how their information might be used by the CDS.      

20. The Council opines that some borrowers may make many loan applications in rapid succession, so it is important that a timeline should be specified to require money lenders to submit personal credit information of their borrowers to the CDS to enable the CDS to quickly update or even provide real-time update of the information to minimise the possibility of borrowers being allowed to take out excessive loans.  The Council notes that in Singapore, money lenders are required to submit information within a day after receiving a loan application, and that a loan may not be granted before information submission_[4], which could be used as reference for Hong Kong.

21. Regarding the proposed requirement on money lenders with a certain business scale to use information in the CDS for assessing borrower affordability (paragraph 31), the Council opines that a phased approach with the goal of eventually requiring all money lenders to use such information should be adopted, and that a timetable for reaching that goal should be set.  This would enhance the comprehensiveness, accuracy and quality of such assessments.

22. To ensure money lenders have sufficient time to base their assessment on information from the CDS, drawing reference from Singapore_[5], the Council further opines that upon receiving a loan application, money lenders should be required to submit a request for personal credit report of the applicant within a day and to obtain the report at least one day prior to approving the loan application.     

Stepping up publicity and education

23. The Council appreciates the Government’s ongoing and planned efforts on publicity and education to promote responsible borrowing and enhancing financial knowledge of the public, including FDH community (paragraph 36)_[6] , young people and low-income earners.  The Council further recommends the following publicity and educational measures to enhance financial education and protection on loan referees:

• For lenders, borrowers and referees (if applicable): Details, restrictions and protections under the MLO;
• For FDHs and non-local residents: Alerts on online scams, including deceptive WhatsApp groups and fraudulent financial websites that mislead individuals into submitting personal information through fake loan application forms.
• For staff of money lenders: Alerts on unscrupulous practices in enticing borrowers and warning of the consequences involved.  

Enhancing regulatory regime of money lenders

24. The Council supports centralising the responsibilities of licensing and supervising money lenders at the Companies Registry (CR) (paragraph 38).  In the money lending study, the Council advocated for consolidating the regulatory functions of the three separate bodies governing money lenders upon an industry-specific regulator, so as to improve the effectiveness of the administration of the regulatory regime.  The proposed centralising of responsibilities would increase regulatory effectiveness.

25. In addition to the current monitoring, the Council is pleased to note that as part of its supervisory efforts, the CR plans to regularly collect statistics from money lenders on complaints received and make use of the analysis of the complaint figures to monitor how money lenders are handling customer complaints.  Such data would also be useful for the CR in identifying trends and issues in the money lending industry and helping proactively prevent or mitigate any issues found.    

26. The Council also supports publishing details of money lenders that have committed offences on the Government’s website, as this can enhance transparency, help consumers choose reputable money lenders, and deter unlawful behaviour.  While the proposal only mentioned money lenders with repeated offences (paragraph 39), the Council suggests the FSTB to clarify the definition of “repeated offences”, and to consider expanding the scope to any money lender that has committed an offence.  Furthermore, to further enhance transparency, while the CR has been conducting site inspections, the CR may further consider publishing the number of site inspections conducted, and also the number of licences revoked, as suggested in the Council’s money lending study.

Suggestions in other areas

Introducing a cooling-off period on unsecured personal loans

27. To further mitigate the risks of over-indebtedness, the Council opines that a cooling-off period on unsecured personal loans should be introduced for loans approved by money lenders, similar to the practice in retail banks in Hong Kong for unsecured consumer credit products_[7].  This would allow consumers a reasonable time to carefully reconsider the financial obligations they have taken up.  The Council notes that in the United Kingdom and the European Union (EU), borrowers have 14 days to change their mind after signing a loan agreement or receiving a copy of the agreement_[8].

Regulating loan advertisements

28. The Council observes that there are loan advertisements that suggest loans can be easily approved.  The Council opines that such advertisements may downplay the financial burden of loans and promote impulsive borrowing.  The Council notes that in the EU, the directive on credit agreements for consumers adopted in 2023 bans misleading advertising that suggests credit would improve consumers’ financial situations or indicates falsely that credit increases financial resources, savings, or living standards.  The directive also allows EU member states to ban advertising that highlights the ease or speed of obtaining credit_[9].  Meanwhile Singapore explicitly prohibits moneylenders from making advertisements that target any vulnerable demographic, including foreign domestic workers_[10].  The Council sincerely invites the FSTB to consider the developments in loan advertisement regulations in other markets, and consider updating advertisement restrictions and requirements via legislation or licensing conditions, so as to further promote responsible lending.

Conclusion

29. The Council fully appreciates the FSTB taking steps to further enhance the regulation of money lenders.  The Council calls upon the FSTB to take into consideration the above comments to enhance protection for consumers.