The COVID-19 pandemic has led to uncertainty and instability in the economy which has negatively impacted cash flow in businesses resulting in layoffs and operational cuts. This has thus led to an increase in money lending. While most people are only aware of illegal money lenders or ah longs as they are commonly known in Malaysia, there are legal money lenders who operate under licenses issued by the Ministry of Housing and Local Government (“KPKT”).
The Movement Control Order (“MCO”) that imposed a nationwide lockdown from March 18 to 3 May 2020 resulted in those people requiring such money lending services unable to leave their homes. Whilst KPKT had announced that they were reviewing standard operating procedures in late 2019 to modernise and encourage legal moneylending, there were no such procedures in place during the MCO.
On 13 November 2020, KPKT announced that 8 companies, including AirAsia’s BigPay Later Sdn Bhd, Axiata Digital Capital Sdn Bhd and Grabfin Operations (M) Sdn Bhd were approved to provide online loans to the public. This allows money lending transactions to operate completely online, via a website or app and enables loans to be approved in mere hours rather than days or weeks. Along with the announcement, KPKT also provided a set of Online Money Lending Guidelines (“Guidelines”) to ensure ease of transactions.
This article highlights 5 Key Takeaways of the Guidelines and a discussion of its effect on moneylending transactions.
1. Additional Laws
· In addition to the Moneylenders Act 1951 (“MLA 1951”), online money lenders are also subject to 5 additional Acts of Parliament including the Stamp Act 1949, the Digital Signature Act 1997, the Electronic Commerce Act 2006, the Electronic Government Activities Act 2007 and the Personal Data Protection Act 2010 (“PDPA 2010”).
· As a result of these additional laws, lenders must be cautious not to breach any of the relevant laws and regulations which are now imposed on online money lending activities as it could lead to various penalties. However, ensuring compliance to these laws is a monumental task placed on KPKT. It remains to be seen if enforcement action will be taken against individual websites or apps providing online money lending.
· As money lending transactions collect substantial personal information from the borrowers such as finances and the money lending agreement is signed digitally, all parties involved must take extra precaution to minimise the risk of forgery and fraud. All personal data collected must be processed in accordance with PDPA 2010 and the relevant regulations.
· The infrastructure that would regulate online money lending transactions are left at the discretion of the lenders. They may choose to develop a website or app to handle the transactions. However, an essential condition is that the lender must ensure the electronic or digital system is able to cope with the needs of both parties. As part of the money lending process, the system has to accurately verify the customer’s identity, display the relevant documents, information and store such digital documents securely.
· The Guidelines require that the lender’s electronic addresses (URL and IP address) be registered with the same business address of the lender. This requirement that the static IP address and the URL have the same address suggest that although there are allowances for online money lending, it appears that there is still a need for the lender to maintain a physical office.
· The Guidelines have not sufficiently addressed the regulation of systems used by the lenders. Development of the system is largely left to the discretion of individual lenders. Despite the potential disputes which may arise from online money lending activities, the Guidelines are silent on the recourse available to the borrowers wishing to raise complaints against the lenders.
3. Attestation of the Agreement
· Attestation of the agreement remain the most important aspect of a money lending transaction prescribed under MLA 1951. Under the MLA 1951, physical attestation was a pre-condition to obtaining a loan. Parties had to physically appear before an advocate and solicitor/commissioner for oath/notary public (“Relevant Person”) who must explain the content of the agreement and the borrower must sign the agreement before the Relevant Person. With the introduction of the Guidelines, this requirement has been done away with and replaced with digital signatures maintained by the electronic or digital system used by lenders in accordance with the requirements under the Electronic Commerce Act 2006 or the Digital Signature Act 1997. According to the Guidelines, attestation of the signatures of the borrower can be carried out by way of live video conference or a pre-recorded video.
· Notwithstanding the relaxation of the requirement on physical attestation, section 27(2) MLA 1951 must be complied with. The person attesting the agreement must still explain the agreement to the borrower digitally to ensure his/her understanding of the transaction. The explanation can be carried out via video call, video chat or other relevant methods. KPKT has not prescribed the form of explanation which is acceptable under the Guidelines to ensure the borrower’s understanding of the agreement.
4. Cyber Security
· A key component of the Guidelines is the emphasis placed on cyber-security and the need to ensure both parties are adequately protected when using the website or app. The Guidelines provide that lenders shall ensure proper security measures are in place to combat cyber-security attacks. Further, they are also required to carry out Security Posture Assessments from time to time to reduce the risk of security threats. Hence, lenders must be wary of possible security threats and invest in anti-virus, anti-malware programmes and constantly monitor and safeguard against incoming attacks.
· Additionally, the lender is entirely responsible for the development of the website and app including its efficiency and security. As it is a wholly virtual process, lenders must take precautions to prevent system failures. Thus, the investment in IT personnel or companies are imperative to the success of the online money lending transaction. This could result in added costs to the lender and if issues arise, they are solely liable for loss or damage incurred.
· The Online Money Lending Guidelines FAQ provides that applications by existing money lenders to operate online can only be made 6 months after the launch of these Guidelines. The reasoning behind this is to give priority to the 8 approved companies to properly develop the system. Thus, it is not an immediate process for most existing money lenders. The application can take time to be processed.
· To ensure a level playing field among all licensed money lenders, KPKT should consider publishing an extensive guideline on the requirements to develop the system so that existing money lenders can undertake measures of digitalising their business and move their operations online as the development of the system can be time consuming.
· Furthermore, the Online Money Lending Checklist set outs additional requirements for online transactions compared to the existing model. An application to obtain online money lending license must be supported by a cover letter for the application of the online money lending license by the applicant, the money lending license granted by the KPKT to the applicant, a proposal on the business based on the Guidelines, proof of registration with the Malaysia Network Information Center (MYNIC Berhad), a practical plan on the website or app to be used and a certificate on the system’s safety. Once the license is obtained, they must be displayed on the app or website used by the lender. This certifies that they are money lenders licensed under the KPKT.
Online money lending is not a recent invention. Other countries have allowed online money lending activities for years. In the United Kingdom, Virgin Money allows for a completely digital process via an app and the money can be transferred within 2 hours or by the end of the next day. In the United States, online money lending is also prevalent to keep up with technological innovations. Many established firms have teamed up with financial technology companies to offer online money lending services. This allows more access for borrowers and makes it faster to receive the money. Online money lending is also popular in Australia with many companies offering wholly virtual services that only require an online application form and phone appointment to receive funds within 24 hours. Thus, it is commendable that Malaysia is finally catching up to other countries in the financial technology industry.
The announcement of the new online money lending initiative is a step in the right direction for Malaysia. While it would have been more welcomed at the beginning of 2020, before the Covid-19 pandemic, it is certainly better late than never. The industry players will be eager to receive further announcement from KPKT in respect of the requirement of the online money lending system and measures required to protect against security threats.