The Money Lenders Ordinance (Cap. 163) (“Ordinance”) has been amended with effect from 30 December 2022 to lower (i) the interest rate cap on any loan from 60% per annum to 48% per annum and (ii) the interest rate threshold in respect of a loan which would render the loan to be presumed to be extortionate from 48% to 36% per annum.

It is important to note that, unless specifically exempted, the statutory interest rate cap and the extortionate interest rate threshold apply not only to money lenders but any person, with regard to any agreement for the repayment of a loan or the payment of interest on a loan. It is now illegal for anyone to lend money at an effective interest rate exceeding 48% per annum unless exempted.

Money lenders and persons engaged in lending and financing should pay heed. Whilst the Ordinance does not apply to authorized institutions under the Banking Ordinance (Cap. 155), the HKMA expects authorized institutions to adopt the revised interest rate limits. Hence, authorized institutions should also take note and observe the new amendments.  

Background and amendments

Lending by money lenders or other persons act as an alternative outside the banking system to provide financial assistance to individuals and companies. The amendments were intended to address the government’s growing concerns about interest rates charged by the money lending sector in recent years, including fears that excessively high interest would harm borrowers and concerns of its ensuing social maladies. The amendments also helped align the Hong Kong regime with the interest rate caps in other jurisdictions - for instance, 48% per annum in Australia, 4% per month in Singapore and 36% per annum in the Mainland China.

Interest rate limits under sections 24(1) and 25(3) of the Ordinance have been amended such that:
(i) the statutory interest rate cap has been lowered from 60% per annum to 48% per annum; and
(ii) the threshold of extortionate rate has been lowered from 48% per annum to 36% per annum.

Meanwhile, Schedule 3 of the Money Lenders Regulations (Cap. 163A) – a summary of the provisions of the Ordinance required to be included in or attached to a note or memorandum of a loan agreement in respect of a loan made by a money lender pursuant to section 18(1)(b) of the Ordinance - has been amended by removing references to the interest rate limits.

No retrospective effect

The revised interest rate limits took effect on 30 December 2022, but such amendments have no retrospective effect. Interest rates stated in any loan agreement in force before such date shall continue to apply.

Lenders are therefore not required to amend existing loan agreements entered into before 30 December 2022 which charge effective interest at a rate higher than 48% per annum, but lenders are required to comply with the revised interest rate limits when making any new loan from 30 December 2022.

Consequences of breach

Any agreement for the repayment of a loan or the payment of interest which charges an effective interest rate exceeding 48% per annum is illegal and unenforceable (section 24(2) of the Ordinance).

On the other hand, any agreement for the repayment of a loan or the payment of interest which charges an effective interest rate exceeding 36% per annum shall be presumed to be an extortionate transaction,   unless the court is satisfied that such rate is reasonable and fair with regard to all the circumstances relating to the agreement (section 25(3) of the Ordinance). Those circumstances include, but are not limited to, the prevailing interest rate when the agreement was made, financial pressure suffered by the debtor at the time of entering into the transaction, degree of risk borne by the lender, and relationship between the debtor and the lender. If the transaction is found to be extortionate, the court may reopen the transaction, and make such orders and direct the terms of transaction as it may think fit.

Unless specifically exempted, any person who lends or offers to lend money at an effective interest rate which exceeds 48% per annum commits an offence and shall be liable to a fine of up to HK$5 million and imprisonment for up to 10 years.

Implications for the lenders in Hong Kong

Money lenders 

The revised interest rate limits should be observed by all licensed money lenders as well as any person who lends money to others.

Legacy loan agreements that had already been in force on 30 December 2022 will not be affected by the revised interest rate limits. However, if the terms of such legacy loan agreements are to be amended after 30 December 2022, it is advisable for lenders to comply with the revised interest rate limits as such amendments may be construed as a new agreement bound by the lowered interest rate limits.

It is important to note that the interest rate cap and extortionate rate threshold are determined by reference to the effective rate of interest of a loan, namely, the true annual percentage rate of interest calculated in accordance with Schedule 2 of the Ordinance. Therefore, any amount paid or payable to the lender (e.g. application fee, administrative fee, etc.) under a loan agreement should be taken into account in computing the effective rate.

Authorized institutions (“AIs”)

Section 12.3 of the Code of Banking Practice provides that AIs should not charge customers extortionate interest rates, or AIs should be able to justify the reasonableness and fairness why such high interest is not unreasonable or unfair. Unless justified by exceptional monetary conditions, the annualized percentage rates on loans should not exceed the legal limits prescribed under the Ordinance.

With reference to the circular of the HKMA dated 27 October 2022 on the implementation arrangements relating to the adoption of the revised interest rate limits, the HKMA expects AIs to adopt the revised interest rate limits in compliance with the Code from 30 December 2022 as well. Even though there is no retrospective effect for credit products offered by the AIs, the HKMA also envisages the AIs to notify and migrate (or at least not unreasonably withhold from such migration) customers who are currently subject to effective interest rates higher than 48% per annum to credit products with lower effective interest rates.

Summary

The amended Ordinance now stipulates that (i) the interest rate cap on a loan shall be 48% per annum and (ii) a loan with an effective interest rate exceeding 36% shall be presumed to be extortionate and may trigger reopening of the transaction by the court.

Lenders should review their loan documentation when making a new loan or revising the terms of a legacy loan to ensure due compliance with revised interest rate limits under the Ordinance.

Pan Tsang and Ruby Cheng

 

For specific advice on lending and the Money Lenders Ordinance (Cap. 163) and related matters in Hong Kong, please contact:-
Pan Tsang | pan_tsang@robertsonshk.com | +852 2861 8487

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.