Over the past year, the EU has launched a number of initiatives to regulate non-performing loans (NPLs) based on the Council's 2017 NPL Action Plan. On 21 November 2023, a new Danish Act on Credit Servicers and Credit Purchasers was passed. The Act, which will enter into force on 30 December 2023, introduces new rules on credit institutions' transfer of non-performing credit agreements and will affect all current and future players in the market.

Three highlights from the news article

  1. With effect from 30 December 2023 when the new Act on Credit Servicers and Credit Purchasers enters into force, credit institutions may transfer their non-performing credit agreements (including their non-performing loans (NPLs)) to a credit purchaser without having to observe the non-disclosure obligation in section 117 of the Financial Business Act. The Act further orders the credit institution to provide the potential credit purchaser with the "necessary information" about the non-performing credit agreement.
  2. Companies that provide credit services must obtain authorisation from the Financial Supervisory Authority and will be subject to a number of statutory rules governing their business conduct. Credit servicing activities provided by certain already regulated companies will not be subject to the Act. Companies currently authorised as debt collection agencies will be able to "convert" their authorisation to become an authorised credit servicer.
  3. Credit servicers and credit purchasers must carry on their business in accordance with good business practice, requiring them, inter alia, to provide certain information to the borrower under the non-performing credit agreement, using specific means of communication.

Secondary market for non-performing credit agreements

The Act aims to promote the development of a secondary market for non-performing credit agreements by making it easier for credit institutions to transfer non-performing credits agreement to a credit purchaser for collection through a credit servicer.

A non-performing credit agreement is defined as a credit agreement (e.g. a loan) that is classified as a non-performing exposure in accordance with Article 47a of the Capital Requirements Regulation. An exposure will be deemed non-performing if (i) it is either considered impaired under the accounting rules, (ii) the borrower is unlikely to meet all of its credit obligations, or (iii) the borrower is past due by more than 90 days on any material credit obligation.

Credit servicers and credit buyers

The Act defines a credit purchaser as any natural or legal person other than a credit institution that purchases a credit institution's non-performing credit agreement in the course of its business.

A credit servicer is defined as a legal person that, in the course of its business, manages and enforces the rights and obligations related to a creditor's (credit institution or credit purchaser) rights under a non-performing credit agreement on behalf of a credit purchaser, and carries out at least one or more of the credit servicing activities listed below.

Credit servicing activities

  • Collection or recovery from the borrower of any payments due related to a creditor's rights under the non-performing credit agreement.
  • Renegotiation with the borrower in accordance with the terms and conditions related to a creditor's rights under the non-performing credit agreement, in line with the instructions given by the credit purchaser.
  • Handling of any complaints related to a creditor's rights under the non-performing credit agreement.
  • Information to the borrower of any changes in interest rates, charges or payments due related to creditor's rights under the non-performing credit agreement.

No separate regulation of credit purchasers

Today, purchasers of non-performing credit agreements issued by credit institutions are not separately regulated in Danish law, and the new Act will not change this. However, credit purchasers will be subject to certain of the rules in the Act e.g. good business practice (see the section "Good business practise" below).

A credit purchaser that seeks to collect purchased non-performing credit agreements itself will be considered both a credit purchaser and a credit servicer and will therefore need to apply for authorisation as a credit servicer.

Exemption of credit servicers from the debt collection legislation

Companies that provide credit servicing of non-performing credit agreements issued by credit institutions are currently covered by debt collection legislation. In the future, credit servicers' credit servicing activities will no longer be subject to the Danish Debt Collection Act. Specific transitional rules will apply to authorised debt collection agencies, allowing them e.g. to "convert" their authorisation to become a credit servicer on the Act.

Authorisation as a credit servicer

Companies that provide credit services must be authorised by the Financial Supervisory Authority. To obtain authorisation

  1. the credit servicer must be a legal person having its registered office in Denmark (credit servicers with a similar authorisation in another EU Member State may operate in Denmark if their authorisation is passported into Denmark, and the same applies to Danish credit servicers' cross-border activities in other EU Member States),
  2. the credit servicer's management members and owners with qualifying holdings must meet certain fit & proper requirements, and
  3. the credit servicer must have adequate governance and control arrangements in place, including risk management and accounting procedures, policies on fair treatment of borrowers, a complaints handling mechanism, and a whistleblower scheme (if it has at least 5 employees).

Further, the credit servicer must meet certain requirements in relation to safekeeping and administration of funds to qualify for authorisation. The credit servicer must

  1. open a separate account in a credit institution where all funds received from the non-performing agreement are held before they are distributed to the relevant credit purchaser,
  2. ensure that the account is protected from the credit servicer's other creditors, in particular in the event of insolvency of the credit servicer,
  3. consider a payment into its account as a payment to the credit purchaser for full or partial reimbursement in relation to the non-performing credit agreement, and
  4. deliver a notice of receipt to the borrower when the funds have been received.

The Financial Supervisory Authority has up to 90 days to process an application for authorisation to carry on credit servicing activities.

Requirement to disclose necessary information to credit purchasers

When transferring non-performing credit agreements, credit institutions are required under the Act to provide the potential credit purchaser with "necessary information" about their rights under the credit agreement or about the agreement itself and, if relevant, about any collateral. However, it is not specified in the Act which information or documentation constitutes "necessary information". It should be noted that such disclosure of "necessary information" must be made to potential purchasers, thus enabling the credit institution to make a structured sale of the non-performing credit agreements.

The explanatory notes to the Act state as follows in relation to the classification of "necessary information":

The information required is the information that allows the credit purchaser to estimate the value of the creditor's rights under the non-performing credit agreement or the non-performing credit agreement itself, including the likelihood of realis-ing the value of the agreement before entering into a contract for transfer of the creditor's rights under the non-performing credit agreement, while also protecting the information provided by the credit institution and the confidentiality of business information.

In addition, Commission Delegated Regulation 2023/2083 specifies which information must be provided by credit institutions to potential credit purchasers when transferring non-performing credit agreements held in their banking book rather than in their trading book.

Exemption to the application of Section 117 of the Danish Financial Business Act

The duty of non-disclosure set out in section 117 of the Financial Business Act - known as the disclosure rules - will not apply to credit institutions' disclosure of confidential information in connection with the transfer of a non-performing credit agreement to a credit purchaser under the Act.

Good business practise

Both credit servicers and credit purchasers must carry on their business in accordance with good business practice. The Minister of Industry, Business and Financial Affairs is authorised to lay down detailed rules for this purpose. The Act further requires credit servicers and credit purchasers (i) to provide information to borrowers that is not misleading, unclear, or inaccurate, (ii) to respect and protect borrowers' personal information and privacy, and (iii) to communicate with borrowers in a way that does not constitute harassment, coercion, or undue influence.

Also, the borrower must, well in advance of the first debt collection, receive a written communication that includes, inter alia, the identification and contact details of the credit purchaser and the credit servicer and information on the amount due at the time of the communication, etc.

Scope of the Act

A number of activities are not covered by the Act, mainly because the Act only applies to credit agreements issued by a credit institution. The following activities do not fall within the Act:

1. Credit servicing activities performed by:

  • credit institutions
  • alternative investment fund man-agers (AIFM)
  • investment management compa-nies
  • mortgage credit companies and notaries, bailiffs, and lawyers providing credit services

2. Purchase of a creditor's rights under a non-performing credit agreement undertaken by a credit institution which is established in the European Unition.

3. Purchase or credit servicing of a creditor's rights under a credit agreement not issued by a credit institution which is established in the European Union.

Effective date

The Act enters into force on 30 December 2023.

Impact of the Act on market operators

Danish credit institutions have no real tradition of selling non-performing credit agreements (including NPLs). After the financial crisis, Finansiel Stabilitet sold a number of portfolios of non-performing loans which it had taken over from banks under resolution, but apart from that, there are not many examples. In particular, the duty of non-disclosure in Section 117 of the Financial Business Act has reduced credit institutions' possibilities of - and interest in - selling their non-performing credit agreements in practice. With the Act on Credit Servicers and Credit Purchasers, the legislator has removed the greatest obstacle for market operators, the non-disclosure rule in section 117 of the Financial Business Act, and in addition, requiring credit institutions to provide all necessary information about their non-performing credit agreements in the event of a sale hereof to a credit purchaser. At the same time, it has become more expensive for credit institutions to have non-performing credit agreements on their books as a result of the rules in the Capital Requirements Regulation on minimum loss coverage for non-performing exposures (the NPE backstop). We therefore expect more to happen in this area in 2024 when the new Act has entered into force. We are following developments closely.

Our advice

Kromann Reumert's Banking and Finance, Insolvency and Restructuring, and Financial Services groups have extensive experience in handling transfers of non-performing credit agreements (including NPLs) and advising on all aspects hereof, including the implications of the Act on Credit Servicers and Credit Purchasers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.