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Dubious Sales Practices Inducing Over-indebtedness The Council Calls for Establishing New Sector-specific Regulator to Build a Fair and Transparent Money Lending Market
A booming consumer lending market in Hong Kong in the past decade has seen a significant twofold rise in licensed money lenders from 779 (in 2009) to 2,260 (August 2019), and similarly there was a substantial surge of over twofold in credit card overdraft and personal loans by authorised institutions totaling $673.9 billion in consumer loans. Despite a rapidly expanded money lending market, the existing Money Lenders Ordinance which has not had any major amendments since its enactment 40 years ago, is rendered outdated and ineffective in regulatory oversight. A Consumer Council study on the sector has unveiled a number of problems including, a lack of market transparency; advertisements with potentially misleading claims; and questionable aggressive sales practices of money lenders. In addition, consumers are generally not knowledgeable in even basic concepts of credit products, credit ratings and interest rates. With enticing commercials on low interest rates, high rebates and lax loan approval procedures, consumers are susceptible to over-indebtedness giving rise to grave concerns.
The Council is concerned that the emergence of severe problems in the money lending market could have a great social-economic impact and regulatory reform is urgently needed. The Government is strongly urged to establish a sector-specific regulator for the supervision of the industry so that a fair and transparent consumer lending market can be built. Furthermore, the Government should take the lead to co-ordinate with non-governmental organisations (NGOs) and the industry in strengthening information dissemination and consumer education to enhance public awareness of credit risks and to empower consumers with the ability to make informed decisions.
The Council today (September 26) published the study entitled “Money Lending – Reforming Law and Trade Practices for Consumer Protection”, with the objective to identify feasible solutions, in the light of the rapid changes in the money lending market, to safeguard the financially strapped consumers in need of borrowing. The study began in early 2018 to examine various consumer borrowing behaviour, including analysing over 300 Council’s complaint cases and interviewing 3 NGOs specialising in financial advisory and debt counselling services, as well as meetings with the borrowers and their families. In addition, the Council also actively engaged with the industry to understand their trade practices and business operations.
The study report also examined the laws and regulations in Hong Kong with reference to 5 jurisdictions – Australia, Mainland China, Singapore, Taiwan and the United Kingdom (UK). The study report has identified a total of 9 problems and put forward a package of 4 recommendations in an effort to stimulate discussion among different stakeholders in the society so that their views and concerns can be taken into account so as to accelerate the regulatory reform.
Borrowing behaviour of consumers
According to the Investor and Financial Education Council’s (IFEC) survey on young working adults, over 60% of respondents were found to have overspent and nearly one-third had debts averaging $37,000; among them 7% had indebtedness of $50,000 or above. In another IFEC survey, the main reasons for borrowing were attributed to: “buying favourite items” and “entertainment/leisure”. Poor debt management and inadequate knowledge about credit products and borrowing costs were common among debtors. Nearly one-fifth (19%) of borrowers were in arrears on repayments while 1% confessed to consistently delaying repayments, reflecting that consumers tended to underestimate the consequences of delayed repayments. The lack of debt counselling support services in the market contributed to the problem, leaving consumers in financial difficulties with no access to assistance in finding the most suitable and affordable credit services.
Debt counselling cases handled by NGOs have also indicated a growing trend of money borrowing from second or third tiered money lenders, involving loan amounts of typically $10,000 or below. Because of the small loan amounts, consumers may borrow from multiple money lenders, sometimes up to 10 and in the most extreme case, up to 120 money lenders. Overspending, inappropriate debt handling and addiction to gambling were the primary causes for consumer over-indebtedness. In terms of population demographics, young borrowers are the fastest growing segment in recent years. According to 1 NGO, online games and supporting Key Opinion Leaders is becoming a common expenditure of the youth and the situation is spreading also to primary school pupils.
The study also found a growing tendency among borrowers to declare bankruptcy when their debts become unmanageable. Statistics of the Official Receiver’s Office showed that despite the number of bankruptcy cases was on a declining trend, multi-time bankruptcy cases surged sharply from 151 cases in 2013 to 617 cases in 2018, an increase of 309%. “Overspending”, “lack of gainful employment” and “excessive use of credit facilities” were the 3 key reasons contributing to multi-time bankruptcy.
Applying for a loan has never been this easy or more convenient, as consumers can now secure instant loans through the internet or social media, and this is a factor contributing to excessive consumer indebtedness. As some money lenders may not carry out credit assessments on borrowers, these money lenders would tend to charge higher interest rates on the loans in order to protect their own interests. To repay such costly credit, borrowers may have to subsequently increase their loans and accept harsher terms and higher interest, as a consequence resulting in their being trapped in a vicious cycle of indebtedness.
Trade practices of money lenders
In a Council survey conducted between May and June last year on advertisements of money lending on the various channels – TV, newspapers/magazines and online websites, it was shown that such advertisements were easily found across all forms of media. The frequency on TV was at least once every hour. Commercials targeting the young generation made sales pitches with claims such as “no credit report required”, “0 or low interest”, “instant approval in 10 minutes”, to promote low interest and high rebate, as well as simple and easy application and approval procedures. Such sales practices unduly influence consumers into under-estimating the true costs of the loans by generating confusing message or deliberately downplaying on the consequences of money borrowing to promote the irrational spending attitude of “buy first, enjoy first”.
Moreover, a diverse range of interest rates is advertised on the websites of some money lenders, depicting loan charges based usually on the lowest annual interest rates only, rendering no reference value to consumers. For example, the Annualised Percentage Rates (APRs) of some lenders could vary from the lowest 9.6% to the highest 59.5%; or from the lowest 4.49% to the highest 59.26%, and the repayment period could also span from 3 months to 7 years. Even consumers with computational skills may find it difficult to make meaningful direct comparisons and may be misled into making erroneous choices of loans at comparatively higher interest rates.
The survey found that some money lending advertisements failed to display the money lender’s licence number as required or the displayed licence number in the advertisements does not correspond to the record on the website of the Companies Registry. This may prevent consumers from ascertaining whether the money lender is licensed, thereby creating difficulty in seeking redress in the event of dispute. The Council had raised such concern to the Companies Registry and relevant government departments in August 2019, and the Companies Registry has, since late September 2019, added the licence numbers of the money lenders to the list of licenced money lenders displayed on its website to facilitate checking by consumers.
The existing regulatory framework
The Money Lenders Ordinance (MLO) was enacted in 1980, with the original aim of combatting the problem of loansharking. Under the MLO, the Registrar of Money Lenders, the Commissioner of Police and the Licensing Court are separately responsible for the regulation, scrutiny and issue of applications for money lender licences. The MLO, in operation for over 40 years without any major amendment, is seriously inadequate in providing consumer protection amidst an increasingly complex money lending environment. The study report has identified 9 problems from the current regulatory framework:
1. Lack of sector specific regulator – the industry has no sector specific regulator to identify systemic risks, provide regulatory guidance and devise binding regulations. Though the police could take enforcement actions upon receiving complaints but, in most cases, it is too late for timely intervention and prevention of the problems at source to safeguard consumer rights and interests;
2. Inadequate vetting on licence applications – low application threshold for money lender licences and simple guidelines currently in place, for example, no specification on the applicants’ work experience and education level. In the past 7 years, only 8 licence applications were rejected;
3. Ineffective regulation on the conduct of money lenders – the MLO lacks regulatory oversight on the daily operation and business conduct of money lenders, for example, no oversight on the tactics used in debt collection. However, the records showed that in the past 7 years, only 1 licence was revoked;
4. Lack of prudent credit assessment – money lenders are not obligated under the MLO to conduct a prudent credit check of the borrowers despite there being similar requirements in the Licensed Money Lenders Association’s code of practice, which, given its voluntary nature and small membership base (only 42), has very limited effect;
5. Abuse of referee’s personal data – in the application for loan, money lenders may ask the borrower to provide personal data of a relative or colleague as the referee. Though the licensing conditions with regard to referees have been tightened in October last year, the MLO does not require money lenders to secure the consent of the referees for use of their personal data for marketing or other purposes. Referees may be exposed to unnecessary harassment;
6. High interest cap – the MLO provides a two-tier interest cap structure. Any annual interest rate exceeding 60% is illegal and the money lending agreement will be deemed invalid, while interest rates between 48% and 60% will be presumed extortionate and as such these loan transactions can be reopened for negotiation. In comparison with other jurisdictions, the current interest cap in Hong Kong is clearly too high;
7. Excessive and misleading advertising – the MLO requires the money lenders to simply display in the ads the lenders’ name, licence number and a risk warning statement. There are neither requirements governing the accuracy of the ad content nor restrictions on those targeting a specific clientele;
8. Limited enforcement tools and consumer redress – non-compliance of MLO is an offence but during the course of investigation and prosecution, the alleged offenders are still allowed to operate their business. Before successful criminal conviction, neither the police nor the Registrar of Money Lenders has the power to impose sanctions on money lenders, reflecting the deterrent effect of MLO is obviously insufficient;
9. Low market transparency – there is currently a shortage of relevant consumer credit data such as the total amount of loans, arrears and default rate, and borrowers demographics, etc which could be collected from money lenders. Enforcement statistics, including the successful conviction rate, are seldom released for public information. Without such data, policy and law review could not be carried out effectively.
The study has also examined the regulatory framework in 5 other jurisdictions – and observed that their regulatory requirements over the money lender’s capital, the interest cap, disclosure of information and advertising are valuable reference for Hong Kong to devise its own regulatory regime. For instance, most jurisdictions have clearly defined the required qualifications, work experience, etc. of licenced holders. On capital requirements, all jurisdictions stated the requirement of adequacy of financial resources, in particular, Mainland China and Singapore have specific capital requirements. On interest restrictions, all but the UK have capped the annual interest rates from 20% to 48% or a monthly rate of 4%. Most jurisdictions have also imposed restrictions on money lending advertisements.
As an international financial hub, Hong Kong has always had a robust money lending market and with the rapid emergence of online platforms providing consumer lending facilities, the Government is obligated to overhaul and improve its regulatory regime to plug the loopholes for strengthening consumer protection and enhancing safeguards. As indicated in the study report, a consumer credit reporting agency and 2 interviewed money lenders have pledged their support to raising the standards of industry members regulation. To address the 9 problem areas identified, the Council has proposed a package of 4 recommendations in the hope that they will improve the conduct of the industry members and ensure both the money lenders and the borrowers will abide by the principle of fairness when performing the contractual obligations.
Amendment of existing legislation
The MLO is outdated having been in use for 40 years. The Council urges the Government to immediately activate the process for the amendment of the MLO including, inter-alia, establishing a sector-specific regulator, imposing a clear duty on money lenders to carry out prudent credit assessments on borrowers so as to ensure their repayment ability before granting a loan; and adjusting the interest rate to a maximum of 48%, subject to further consultation with the industry to determine the most appropriate rate. In addition, there should be a uniform method of calculation and presentation of interest rates across money lenders to facilitate consumers to make proper comparisons of interest costs of different loan products. Moreover, restrictions on advertising should be introduced in the MLO to ensure it will not mislead or downplay the serious consequences of taking out a loan, and to display a clear warning statement throughout the entire duration of the advertisement.
Introduction of new sector specific regulator
Setting up a sector-specific regulator is recommended so as to strengthen the vetting process of money lender licence applications, raise the bar for entry requirements, and introduce threshold requirements for a fit and proper person to better govern the money lending practice. The regulator will set down clear guidelines on capital requirements and the submission of a business plan and the source of funds; approval requirements for any subsequent changes in the company directorship and management; licensees’ qualifications, for instance, their work experience, education level and criminal record; and extending background checks of licensees to include ongoing or concluded investigations and civil judgments and proceedings.
In order to promote responsible lending, the regulator should make prudent credit assessment mandatory as a licensing condition. Consideration should be given to requiring mandatory collection of consumer credit data to be stored into a central data repository which could be shared among relevant stakeholders. The Council further proposes for the regulator to consider incorporating the Licensed Money Lenders Association’s code of practice to combat undesirable trade practices.
Furthermore, the regulator should be empowered to implement enforcement actions and be given more enforcement tools such as public reprimands, enforcement notices, prohibition of individuals from engaging in money lending business, and disciplinary actions against a director, a partner or the management of a money lender.
Improve market transparency
The regulator should collect consumer credit statistics and loan profiles from money lenders on a regular basis, including the total amount of new loans, average tenure, outstanding loans, arrears and default rates, etc. For the sake of fostering good trade practices, enforcement statistics should be published regularly, including the number of objections issued, and licences revoked/suspended and the reasons for such action as well as the number of complaints received and handled.
Strengthen consumer education and the provision of advisory services
As shown in the study, excessive spending is the primary cause of borrowing for the younger generation. Therefore, building and fostering a culture of healthy and responsible borrowing is crucial. The Council strongly urges the Government to take the lead to coordinate with the NGOs and industry players to launch a platform to deliver consumer education and information, and advice on debt management to help out distressed consumers in need of money borrowing.
The Council recognises the important role and function of money lenders in the society, and believes that the responsibility for the long-term sustainable development of the money lending market lies squarely with the Government, borrowers and the industry. A comprehensive reform of all areas, including legislation, regulatory model and trade practices, is needed to safeguard consumer rights and interests in borrowing, and to ensure the healthy development of the money lending market in Hong Kong.