On 15 January 2015, the Department of Finance published the Consumer Protection (Regulation of Credit Servicing Firms) Bill (the Bill). The Bill follows the Consultation Paper on the Regulation of Loan Portfolio Buyers (the Consultation Paper) that was issued by the Department of Finance in July 2014 (see our briefing on the Consultation Paper: AC Briefing on CP.)
The Consultation Paper proposed draft legislation that would have required the holders of credit provided to individuals to be authorised under the existing retail credit firm regime. Under the Bill the focus has shifted significantly to regulation of the servicers of the credit rather than the holders of the credit. The Bill also introduces amendments that will impact upon the existing retail credit regime.
We set out below the key points of the Bill:
- The Bill creates a new category of regulated entity called a "credit servicing firm".
- The credit servicing regime will apply to the servicing of loans covered by the existing retail credit firm regime (i.e. lending to individuals) and also to loans made to SMEs.
- The Bill appears to inadvertently introduce a new licensing requirement for lending to SMEs.
- The definition of credit servicing is very broad and covers the management and administration of a credit agreement.
- Credit servicing will exclude certain activities including decisions relating to portfolio management and enforcement action on specific credit agreements.
- The Bill contains transitional arrangements for both retail credit firms and credit servicing firms.
- The jurisdiction of the Financial Services Ombudsman (FSO) will be extended to include complaints in respect of credit servicing.
- The regulated financial service provider exemption from the retail credit firm regime has been narrowed to entities authorised to provide credit.
These points are discussed in more detail in the remainder of the briefing.
REGULATION OF CREDIT SERVICING FIRMS – SCOPE
The Bill amends the Central Bank Act 1997 (CBA 97) by creating a new category of "regulated business" called a "credit servicing firm". A "credit servicing firm" is defined as an entity that:
- undertakes credit servicing other than on behalf of a regulated financial service provider, or
holds the legal title to credit in respect of which credit
servicing is not being undertaken by:
- a regulated financial service provider authorised, by the Central Bank of Ireland (CBI) or another EEA regulator, to provide credit in Ireland, or
- an authorised credit servicing firm.
The definition expressly excludes NAMA and regulated financial service providers authorised by the CBI, or by another EEA regulator, to provide credit in Ireland (i.e. it therefore excludes Irish banks and EU banks passporting into Ireland – however, it does not exempt authorised servicers located in other EU jurisdictions).
The definition is clear that a holder of credit will not be required to be authorised as a credit servicing firm where the servicing is carried out by an authorised credit servicing firm or by another regulated entity which is authorised to provide credit in Ireland (e.g. a credit institution or a retail credit firm).
An entity that only provides credit servicing to regulated financial service providers will not be required to be authorised as a credit servicing firm (i.e. an entity that only provides servicing to banks will not need to become licensed as a credit servicing firm).
DEFINITION OF CREDIT SERVICING
"Credit servicing" is defined as "managing and administering a credit agreement", and the Bill specifies the below list of activities that are expressly included within the definition:
- notifying the borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the borrower to be notified;
- taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the borrower;
- managing or administering any of the following:
- repayments under the credit agreement;
- any charges imposed on the borrower under the credit agreement;
- any errors made in relation to the credit agreement;
- any complaints made by the borrower;
- information or records relating to the borrower in respect of the credit agreement;
- the process by which a borrower's financial difficulties are addressed;
- any alternative arrangements for repayment or other restructuring;
- assessment of the borrower's financial circumstances and ability to repay under the credit agreement.
- communicating with the borrower in respect of any of the matters above.
The definition of credit servicing is very broad but the Bill expressly excludes the following activities from the definition, which appears to be an attempt to bring SPVs that have appointed a credit servicing firm outside the scope of the new regime:
- the determination of the overall strategy for the management and administration of a portfolio of credit agreements;
- the maintenance of control over key decisions relating to such portfolio; or
- taking such steps as may be necessary for the purposes of:
- enabling credit servicing by another entity, or
- enforcing a credit agreement.
The above exclusion applies provided the above activities are not undertaken in a manner which, if undertaken by a regulated financial service provider, would breach any provision of financial services legislation. While the above excluded activities are unregulated and may not trigger a requirement to be authorised, the entity must carry out these activities in accordance with financial services legislation, including the CBI statutory codes of conduct. This will be particularly relevant to decisions on enforcing credit agreements. Unregulated holders of credit will be obliged to apply the arrears handling provisions of the Consumer Protection Code (CPC), the Code of Conduct on Lending to Small and Medium Enterprises (SME Code) and the Code of Conduct on Mortgage Arrears. The concept of a person avoiding regulation, so long as they comply with relevant requirements as though they were regulated is unusual to say the least – but perhaps is intended to ensure that the various CBI codes of conduct are complied with on enforcement, in particular.
In essence, in order to keep beneficial owners of loans (e.g. securitisation SPVs) out of scope, the Bill draws a distinction between high level strategic decision making relating to the management of the portfolio and more granular decision making relating to management of each loan. Strategic decisions relating to overall portfolio management will not trigger a requirement to be authorised. For example, this might include the setting of a credit policy to guide the credit servicing firm. In contrast, any decision relating to an individual credit agreement (e.g. the restructure of a loan) will be a credit servicing activity. The only exception to this distinction is decisions relating to the enforcement of a credit agreement.
TYPE OF CREDIT AFFECTED
The Bill applies to cash loans provided to:
- natural persons (except for professional investors under MiFID and other regulated financial service providers); and
- micro, small or medium-sized enterprises (SMEs) within the meaning of` Commission Recommendation 2003/361/EC of 6 May 2003.
The definition of SME under the Commission Recommendation consists of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. The meaning of enterprise is not limited by legal form. Therefore, it includes sole traders, partnerships, unincorporated bodies and incorporated bodies engaged in an economic activity.
The Commission Recommendation makes provision for the exclusion of certain SMEs that are within a group of companies ("linked enterprises") or are partnered with a larger enterprise ("partnered enterprises"). However, the Bill refers expressly to the defintion of SME in Article 2 of the Annex to the Commission Recommendation (outlined above and which does not itself contain the exclusions) and so it is not clear whether the Bill intends to apply the exclusions for "linked" and "partnered" enterprises. The SME definition is broad and potentially difficult to police, so it is likely to trip up lenders.
The scope of application of the Bill goes beyond the scope of the SME Code as, unlike the SME Code, it does not include a carve-out for SPVs or syndicated lending. This could lead to the situation where an entity is required to be licensed because it lends to SMEs but where the SME Code does not apply because an exemption is available under the SME Code. This would be at odds with the policy premise of the legislation. The Bill also does not include a carve-out for intra-group lending and is not, on its face at least, limited to SMEs located in Ireland.
The application of the credit servicing regime to SMEs does not affect the scope of the existing retail credit regime and lending to SMEs will not trigger a requirement to be authorised as a retail credit firm.
However, the effect of the proposed legislation is that lending to SMEs will trigger a requirement to be authorised as a credit servicing firm where the lender services the loans - this is because the holder of legal title to credit issued to natural persons and SMEs is deemed to be a credit servicing firm itself where credit servicing is not being undertaken by a credit servicing firm or an Irish/ EU regulated financial services provider authorised to provide credit in Ireland. At present, lending to SMEs does not trigger a licensing requirement.
As a result, non-EEA banks are now potentially subject to a licensing requirement on participation in a syndicate unless the borrower is clearly not an SME.
There are a large number of lenders in the market who engage in unregulated lending to SMEs which will be impacted by this extension of the licensing net – which we assume must be unintended as it appears to be at odds with the Department of Finance's aim of facilitating the provision of credit to the SME sector and was not flagged as a policy intention previously.
AMENDMENT TO THE RETAIL CREDIT FIRM REGIME
Under the current retail credit regime the definition of retail credit firm excludes a regulated financial service provider, i.e. an entity regulated by the CBI or another EEA regulator. This exemption applies regardless of the type of authorisation held by the regulated financial service provider, and the authorisation does not need to be related to the provision of credit.
Under the Bill the exemption for regulated financial service providers will be narrowed to apply only to an entity that is regulated by the CBI or another EEA regulator to provide credit in Ireland (i.e. licensed Irish banks or EU passported banks).
There are currently entities providing credit in Ireland who hold an authorisation that is unrelated to the provision of credit but which brings them outside the retail credit firm regime as they qualify as regulated financial service providers. These entities will now require authorisation as retail credit firms. The Bill has been drafted with this in mind, and the CBA 97 has been amended to include transitional arrangements for entities carrying on the business of a retail credit firm but who did not require authorisation before the proposed legislation comes into operation. These are discussed in more detail below.
The Bill amends the CBA 97 to provide for transitional arrangements for both retail credit firms and credit servicing firms, which are broadly similar.
Under the Bill an entity carrying on the business of a retail credit firm (but which did not require authorisation) or a credit servicing firm before commencement of the legislation is taken to be authorised to carry on such business until the CBI has granted or refused authorisation, provided that an application for authorisation is lodged within three months of commencement of the legislation. During that period the CBI can impose conditions/requirements on the applicant and/or direct that the applicant not carry on the regulated business. For example, it is probable that the CBI will require applicants to comply with all applicable legislation and CBI statutory codes pending completion of the application.
We assume the CBI will publish guidance on the licensing process shortly – and that it will be reasonable to expect that the application procedure will be similar in terms of process and timing to the current licensing procedure for retail credit firms.
The Bill extends the jurisdiction of the FSO to cover complaints by borrowers who, in respect of a credit agreement, are customers of a financial service provider and the servicing is done by a credit servicing firm. Under these amendments the borrower will be able to submit a complaint in respect of the financial service provider (i.e. the holder of the credit) and the credit servicing firm.
Under current legislation credit provided by credit unions and registered societies is outside the scope of the Consumer Credit Act 1995 (CCA) and the CPC. The Bill provides that where the credit provided by a credit union or registered society is transferred to an entity that is not a credit union or registered society then the credit will be subject to the CCA. The ultimate effect of this amendment is that the transferred credit will also become subject to the CPC.
The decision to regulate the servicers of credit is a welcome change from the proposal contained in the Consultation Paper. The Bill strikes a balance between consumer protection and imposing a regime that is practical for the industry. Regulation in this area was already anticipated and well sign-posted.
The more controversial elements of the Bill relate to:
- the application of the credit servicing regime to lending to SMEs - and what we assume is the inadvertent consequence that lending to SMEs will trigger a licensing requirement under the credit servicing regime unless the lender outsources the servicing role;
- the requirement that unregulated holders of credit comply with financial services legislation when making decisions on strategic portfolio management and enforcement; and
- the fact that credit servicers authorised in other EU jurisdictions will be required to apply for a licence to act as a credit servicing firm in Ireland, unless they are also authorised to provide credit in Ireland.
The Bill has not been debated in the Dáil but there will be broad political support for this form of regulation and, in our view, it is unlikely that significant changes will be made during the legislative process (other than to correct drafting issues of the sort identified above).
It is intended that the legislation will be enacted in early 2015.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.