Servicers of retail credit (and certain types of SME credit) in Ireland now trigger an authorisation requirement with effect from 8 July 2015, the date on which the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the Act) was signed into law.
The signing of the Act into law follows a public consultation, by the Department of Finance, on the regulation of loan portfolio buyers in July 2014 (see our July 2014 Briefing here) and the publication of the Consumer Protection (Regulation of Credit Servicing Firms) Bill (the Bill) in January 2015 (see our January 2015 Briefing here). A link to the new Act is here.
The aim of the Act is to continue to afford consumers, whose loans are sold by regulated entities to unregulated entities, the protections to which they would have been entitled had their loans not been sold.
2. WHO NEEDS TO APPLY FOR AUTHORISATION?
Each of the following will now require authorisation by the Central Bank as a "credit servicing firm":
- persons who undertake "credit servicing" other than those who undertake credit servicing on behalf of a regulated financial services provider (RFSP) where that RFSP is authorised to provide credit in Ireland by the Central Bank of Ireland or its equivalent in another EEA country (i.e. a passported bank);
- persons who hold legal title to credit granted under a credit agreement, where that credit is not being serviced by a "credit servicing firm" (whether such firm is specifically authorised under the Act, or whether such firm is a Deemed Credit Servicing Firm – see below).
3. WHO WILL BE DEEMED TO BE AUTHORISED?
Existing RFSPs who are already authorised to provide credit in Ireland, whether by the Central Bank or by an equivalent authority in another EEA country (i.e. a passported bank), irrespective of whether their authorisation was granted before or after 8 July 2015 (Deemed Credit Servicing Firms) will be deemed authorised.
4. WHO IS EXCLUDED FROM THE REQUIREMENT TO BE AUTHORISED AS A "CREDIT SERVICING FIRM"?
- persons providing credit servicing to RFSPs where those RFSPs are authorised to provide credit in Ireland; and
- holders of legal title to credit (such as loan portfolio buyers) where the credit is being serviced by a "credit servicing firm" (whether that firm is specifically authorised under the Act, or whether that firm is a Deemed Credit Servicing Firm).
5. WHAT TYPES OF CREDIT AGREEMENTS ARE IN SCOPE?
Credit agreements under which cash loans are provided to relevant borrowers. A "relevant borrower" is either:
- a natural person (unless he/she is a professional client under MiFID or an RFSP); or
- a micro, small or medium-sized enterprise (SME) within the meaning of` Commission Recommendation 2003/361/ EC of 6 May 2003 (the SME Recommendation) but only to the extent that the credit was advanced to the SME by an RFSP (this is an important clarification made to the Bill, which had inadvertently imposed a licencing requirement on originators of SME credit).
The definition of "relevant borrower" is not, as regards SMEs, expressly limited to SMEs located in Ireland (but this can perhaps be implied from the purpose of the Act as the Code of Conduct on Business Lending to Small and Medium Enterprises 2012 (the SME Code) only applies to SMEs in Ireland).
Where the original credit agreement was entered into by the SME with an unregulated lender (whether that lender was a separate entity or a member of the SME's group), the new regulatory regime does not apply to the servicing of that credit, whether by the purchaser of that loan or by a servicer appointed by that purchaser. While the Bill's scope was originally broader, this limitation was included at Dáil Committee stage.
6. WHAT IS AN SME WITHIN THE MEANING OF THE SME RECOMMENDATION?
The SME Recommendation defines an SME as an enterprise which:
- employs fewer than 250 people; and
- has an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million.
It includes sole traders, partnerships, unincorporated bodies and incorporated bodies engaged in an economic activity.
Under the SME Recommendation, the question of whether an enterprise meets the above test is, where the enterprise has one or more "partner enterprises" or "linked enterprises" (each within the meaning of the SME Recommendation), answered by reference to data referable to the enterprise itself, data referable to any partner enterprise immediately upstream or downstream from it and data referable to any enterprise linked directly or indirectly to the enterprise in question. The SME definition is broad and potentially difficult to police, so is likely to trip up lenders and is also wider than the definition used in the SME Code which excludes loans to SPVs.
7. WHAT IS "CREDIT SERVICING" UNDER THE ACT?
"Credit servicing" is defined as "managing and administering a credit agreement", and expressly includes the following activities:
- notifying the borrower of interest rate changes, changes in repayments, and other matters that the borrower must be told about under the terms of the credit agreement;
- taking any necessary steps to collect or recover amounts due under the credit agreement from the borrower;
- managing or administering day-to-day matters such as repayments, charges, errors, complaints, information and records, and matters concerning financial difficulties, including how financial difficulties are addressed, alternative repayment arrangements, restructurings, and assessments of a borrower's ability to repay; and
- communicating with the borrower in respect of any of the matters above.
8. WHAT DOES NOT CONSTITUTE "CREDIT SERVICING" UNDER THE ACT?
While the definition of "credit servicing" is very broad, the following activities are expressly excluded from the definition:
- determining the overall strategy for the management and administration of the relevant loan book;
- maintaining control over key decisions relating to that loan book;
- taking steps as are needed to enforce a credit agreement; and
- taking such steps as are needed to appoint a servicer.
This appears designed to ensure that where an SPV has purchased a loan book, and has appointed an authorised credit servicing firm to service the loans, it is not brought within the new regulatory regime by reason only of performing one of the 'out of scope' activities.
In summary, the Act distinguishes between high level strategic decision-making relating to the management of the loan book (generally out of scope) and more granular decision-making relating to management of each loan (generally in scope). The only exception to this distinction is decisions relating to the enforcement of a credit agreement – where these are taken by an SPV who has outsourced the servicing of the credit agreement, that decision-making process by the SPV will bring it in scope for the purposes of the new regime.
9. MORE FIRMS WILL REQUIRE REGULATION AS "RETAIL CREDIT FIRMS"
- Existing position: until the Act came into law, an RFSP did not need to be separately authorised as a "retail credit firm" when providing cash loans to "relevant borrowers";
- Act: however, the definition of "retail credit firm" has been amended by the Act to limit that exemption to RFSPs authorised to provide credit in Ireland, whether by the Central Bank or an equivalent authority in another EEA country;
- Implications: this means that firms providing cash loans to relevant borrowers who, before 8 July 2015, did not require authorisation as a "retail credit firm" because they were RFSPs now require authorisation unless their current authorisation in either Ireland or another EEA country covers the provision of credit and permits them to provide credit in Ireland (in the case of EEA entities this will require a passport to be held); and
- Transitional period: there is a 3 month transitional period under the Act. Where an RFSP did not require authorisation as a "retail credit firm" prior to 8 July 2015, but now requires authorisation, it will only be taken to be authorised if it applies to the Central Bank for authorisation before 8 October 2015. The Central Bank may impose conditions/requirements on that RFSP and/or direct that the RFSP not carry on business as a "retail credit firm" for a specified period not exceeding 3 months.
10. THE CENTRAL BANK'S AUTHORISATION PROCESS
On 14 July 2015, the Central Bank's webpage for credit servicing firms went live here.
Existing credit servicing firms:
- the Central Bank confirmed that the Act provides for firms that were conducting credit servicing before 8 July 2015 to be deemed authorised (provided that they apply for authorisation by 8 October 2015) until the Central Bank confirms the grant or refusal of an authorisation;
- where such a firm is deemed authorised, it must:
- i. comply with financial services legislation including the Consumer Protection Code 2012 (the CPC), the Code of Conduct on Mortgage Arrears 2013 (the CCMA), the SME Code, the Minimum Competency Code 2011 (the MCC), Part V of the Central Bank Act 1997 and the Central Bank's Fitness and Probity Regime; and
- ii. take steps to update its systems, policies, procedures and documentation to ensure compliance with these requirements, and train staff accordingly.
New credit servicing firms: the Central Bank noted that persons who had not been conducting credit servicing before 8 July 2015 cannot provide such services until granted authorisation to do so by the Central Bank;
Consultation Paper: the Central Bank published Consultation Paper 96 (Consultation on the Authorisation Requirements and Standards for Credit Servicing Firms and Consequential Amendments to Statutory Codes, available here). The following points should be noted:
- once the consultation period ends and the Authorisation Requirements and Standards for Credit Servicing Firms are completed and issued, the Central Bank intends to apply corresponding standards to retail credit firms after a further public consultation;
- requirements in relation to the following have been
specifically highlighted by the Central Bank as key areas on which
it is seeking the views of interested parties:
- i. Professional indemnity insurance: a proposal that each credit servicing firm be required to have a professional indemnity insurance policy in place with the amount insured being a minimum of €1.25 million per claim and €1.85 million in aggregate for a single policy period;
- ii. Outsourcing: a proposal that a credit servicing firm be obliged to notify the Central Bank in advance if it intends to outsource any important operational functions;
- iii. IT: a proposal that a credit servicing firm have adequate IT systems in place with a view to reducing the risk of breaches of financial services legislation;
- iv. Independent review: a proposal that a credit servicing firm may be obliged to arrange for a third party to review its operations, systems and controls;
- v. Dealing with holders of credit:
- a proposal that a credit servicing firm be required to inform (in writing) the holder of the credit of its obligations under financial services legislation; and
- a proposal that a credit servicing firm be required to demonstrate how its agreement with the holder of the credit enables it to comply in full with its obligations under financial services legislation;
- vi. Codes: consequential amendments to the CPC, the SME Code, the CCMA and the MCC;
- vii. Applications made before consultation period closes: the Central Bank has confirmed that persons seeking authorisation before the consultation period ends on 30 September 2015 must:
- submit a completed application form for authorisation as a credit servicing firm (available on the Central Bank's website); and
- submit a completed Individual Questionnaire for each person proposed as a holder of a Pre-Approval Controlled Function.
11. OTHER KEY POINTS TO NOTE
- Liability: where a credit servicing firm takes or omits to take action, and such action or inaction would be a prescribed contravention if the action or omission was taken or not taken by a retail credit firm, it commits an offence and will be liable on summary conviction to a Class A fine or a maximum 12 month prison term, or on conviction on indictment to a fine not exceeding €250,000 or a maximum 5 year prison term. The same penalties apply to a holder of credit who instructs a credit servicing firm to take or fail to take a particular action which would, if taken or omitted to be taken by a retail credit firm, be a prescribed contravention;
- Financial Services Ombudsman - extension of jurisdiction: the Act extends the FSO's jurisdiction to cover complaints by borrowers whose loans are serviced by authorised credit servicing firms;
- Credit Unions: until the Act came into effect, credit provided by credit unions and registered societies was outside the scope of both the Consumer Credit Act 1995 (the CCA) and the Central Bank's codes. Now, where such credit is transferred to an entity that is not a credit union or registered society, the credit will become subject to the CCA and, as a result, subject to the Central Bank's codes.
The Act 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.
Firms can now apply for authorisation under the new regime, although the fact that the Central Bank is simultaneously consulting on some of the authorisation requirements and standards is a little unusual. Firms who will be caught by the licencing requirement should, however, take steps immediately to begin their application process.
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.