Lenders beware – 48 is the new 60

What are the amendments?

Sections 24(1) and 25(3) of the MLO will be amended such that:

• the statutory interest rate cap (the "Excessive Rate") be lowered from 60% per annum to 48% per annum; and

• the extortionate rate (the "Extortionate Rate") be lowered from 48% per annum to 36% per annum

(together the "Amended Interest Rate Limits").

Schedule 3 of the Money Lenders Regulations (Cap. 163A), which is a form of the summary of the relevant provisions of the MLO required to be included in or attached to a note or memorandum of a loan agreement pursuant to section 18(1)(b) of the MLO, will also be amended by removing specific references to the limit threshold amounts and cross-referencing to the relevant sections of the MLO that sets out the Amended Interest Rate Limits.

The amendments are made to catch up with current times and in line with the Hong Kong SAR government's goal to protect public interest, to encourage and promote responsible borrowing through regulatory measures and public education and to mitigate risks posed by excessive borrowing, in particular by individual consumers.

Click here to view the LegCo brief on the Amended Interest Rate Limits.  

When do the amendments take effect?

The Amended Interest Rate Limits take effect on 30 December 2022. Such limits will have no retrospective effect in accordance with Sections 24(3) and 25(9) of the MLO, which provides that interest rates contained in agreements which are currently in force shall continue to apply after the Amended Interest Rate Limits take effect.

In other words, lenders are not required to amend or reopen existing arrangements entered into prior to 30 December 2022 which charge an effective interest rate higher than 48% per annum, but will be required to adopt the Amended Interest Rate Limits in any lending arrangements entered into from (and including) 30 December 2022 which are subject to the MLO.

Consequences of breach

The consequences for breaching the Amended Interest Rate Limits under the MLO will remain unchanged, which include:  

1. Criminal offence and penalty - Under section 24(1) of the MLO, any person, except authorised institutions as defined under the Banking Ordinance (Cap. 155) ("AIs"), who lends or offers to lend money at an effective rate which exceeds the Excessive Rate commits an offence and shall be liable under section 24(4) of the MLO:

• on summary conviction, to a fine of up to HK$500,000 and to imprisonment for up to 2 years; and
• on conviction on indictment, to a fine of up to HK$5,000,000 and to imprisonment for up to 10 years.

2. Enforceability

• Excessive Rate - Any contract which is subject to the MLO and charges (or purports to charge) an effective interest rate which exceeds the Excessive Rate, together with any security or other credit support granted to secure such contract, is unenforceable pursuant to section 24(2) of the MLO.
• Extortionate Rate - Under section 25(3) of the MLO, if the effective interest rate under an agreement for the repayment of a loan or for payment of any interest on a loan exceeds the Extortionate Rate, the transaction is presumed to be extortionate unless proven by the facts that the transaction is reasonable and fair. If the transaction is found to be extortionate, a Hong Kong court may reopen the transaction and make such orders that it may think fit.

What does this mean for the money-lending sector in Hong Kong?

(1)Application of sections 24 and 25 of the MLO

1. Non-AI lenders - The Excessive Rate and the Extortionate Rate apply to all lenders (whether licensed money lenders or not), except (i) AIs, (ii) loans that are made to a Hong Kong or overseas company that has a paid up share capital of not less than HK$1 million (or its equivalent in another currency which is freely convertible into Hong Kong dollars) and (iii) persons who make the loan mentioned in sub-paragraph (ii) above. Note that although AIs are not subject to the provisions of the MLO and subsidiaries of AIs are exempted from obtaining a money lenders licence, subsidiaries of AIs are subject to sections 24 and 25 of the MLO.

Whether the Amended Interest Rate Limits apply would depend on:

1. if the lender carries (or holds itself out as carrying) on money-lending business in Hong Kong at the time of making the agreement; and
2. the proper law of the agreement being Hong Kong law when objectively assessed, which include relevant factors such as the place of the lender’s business and the place where the loan is advanced and repaid to ascertain the transaction's nexus with Hong Kong. In the circumstance where the loan agreement is governed by foreign law, the Hong Kong court will assess if the proper law of the agreement should have been Hong Kong law.

2. AIs - Although AIs are not subject to the MLO pursuant to section 3 of the MLO, the Code of Banking Practice (the "CBP") states that AIs should not charge effective interest rates which would presume to be extortionate under the MLO, or otherwise AIs should need to justify that charging any effective rate above the Extortionate Rate (but not exceeding the Excessive Rate) was reasonable and fair.

Unless justified by exceptional monetary conditions, the effective interest rate charged on any loan advanced by AIs should not exceed the Excessive Rate as stated in the MLO.

3. Summary – Unless it is clear that the lender and/or the loan arrangement entered into by the lender are not subject to the MLO or the CBP, the lender shall not enter into any new loan arrangement on or after 30 December 2022 which charges effective interest rates (as defined in the MLO) that exceed the Amended Interest Rate Limits.

(2)New loan vs amendments to legacy loan

Instead of entering into a new loan facility transaction, it is not uncommon that lenders may sometimes prefer to structure a tenor extension or a refinancing by amending a legacy loan arrangement in order to enjoy, among other things, the benefit of any existing security and credit support package provided.

If such legacy loan arrangement was charging an effective interest rate above 48% per annum, and the proposed amendment to extend the loan tenor was to be papered and completed on or after 30 December 2022, the lender should, in those circumstances, consider whether the existing effective rate might need to be adjusted in accordance with the Amended Interest Rate Limits even though technically the legacy loan (including the interest rates and other terms) was already in force prior to the Amended Interest Rate Limits coming into effect.

(3) HKMA's guidance regarding prior notification

The Hong Kong Monetary Authority ("HKMA") has issued today a circular to all AIs regarding the implementation arrangements relating to the adoption of the Amended Interest Rate Limits:

1. HKMA expects AIs to notify and take steps to migrate customers (or not to unreasonably withhold them from such migration) who are currently subject to effective interest rates higher than 48% per annum to credit products which charge lower effective interest rates.
2. HKMA has also provided guidance in respect of customer prior communication. The guidance includes the following measures:

Click here for the HKMA circular for full details.

Urgency and next steps

The resolution has been passed on 26 October 2022. Although lenders are not required to amend any legacy agreements which charge effective interest rates higher than 48% per annum (subject to the points raised in paragraph (2) (New loan vs amendments to legacy loan) above), as a matter of good practice, lenders (including AIs) should start reviewing the interest rate terms of their existing and prospective lending and credit arrangements to ensure borrowers and customers would receive sufficient prior written notice.

Non-compliance with the Amended Interest Rate Limits risk serious penalties that should not be taken lightly. Stakeholders of the industry should be prepared to adopt appropriate measures to ensure the Amended Interest Rate Limits are complied with from 30 December 2022 onwards.

Application of the MLO in respect of a loan arrangement and/or a non-AI lender, including the implications of amendments to any legacy transaction, are fact sensitive and need to be considered on its own merits. We regularly advise credit funds and other non-AI lenders on their loan transactions, including the MLO analysis, and are well placed to assist you in this regard. 

To the extent you may require assistance to conduct any document review of any legacy transaction documents, we also have a number of legal technologies offerings available to help you achieve cost efficiencies.

Authored by Louise Leung, Derrick Lau, Fiona Wong, and Hillary Chung.