The EU's new Credit Servicers Directive – a (slow) step in the right direction or more challenging times ahead?
After a relatively quiet period, the last few months have been very eventful as far as progress on the Credit Servicers Directive is concerned. For an update of what happened up to this point, one should read this Client Alert, and any updates to it, in conjunction with our coverage from April 16, 20191. In this Client Alert, we look at the way forward to what is a far-reaching set of changes to how servicers and purchasers of credit exposures operate.
So where are we now?
Despite the name, the EU-27-wide regime in the Directive applies to credit servicers, credit purchasers and also the recovery of collateral. Moreover, while the proposal stems from workstreams from the EU's Action Plan on NPLs, it is likely to have considerable impact on all types of exposures, regardless of whether they are performing or not. This EU-wide Directive – like the European Central Bank's (ECB) work on NPLs that borrowed from what it considered the "best practices" of Irish and Spanish rules on reducing NPLs, which ultimately led to the EU-27 NPL Action Plan – will likely be familiar to those that have followed the Irish and Spanish rules on credit servicing standards.
Consequently, some stakeholders as well as policymakers have raised questions as to why, after 10 years of falling NPL stocks, does the EU need to take action now? The response, including from the ECB, has been that the Directive, which is a Capital Markets Union and European Commission priority, is about harmonizing best practice across the EU by levelling the playing field as well as preventing future build-up of NPLs. It remains to be seen how quickly this Directive will continue to progress given that domestic political turmoil in Germany is causing concern that some momentum may be lost in Brussels. This is problematic as the original legislative proposal envisaged that the Directive would be transposed into national law by December 31, 2020, with implementing measures to be in place by January 1, 2021. Regardless of the timing, the Directive's provisions will require action from a range of stakeholders.
Some of the Directives' changes may present business opportunities. This includes those that arise from the proposed EU passporting regime for credit servicers, which is aimed at lowering existing barriers of entry into this market, as well as building liquidity in cross-border secondary markets for non-performing loans and exposures (collectively, NPLs)2. Other changes, however innovative, are not without difficulty, and are thus viewed by some stakeholders as controversial3. Chief amongst these contentious points is the tool known as an "accelerated extrajudicial collateral enforcement procedure (AECE)4" that is designed to speed up the recovery of collateral. The co-legislators, due to lack of progress on the original proposals for the AECE, decided to split the consideration of the AECE from the rest of the Directive. That split has not necessarily meant resolution. Given all of the above, the Directive remains a core deliverable for completing the Banking Union and the Capital Markets Union . As a result, do not expect the Directive to be derailed, even if it looks like it could suffer some delays.
After the procedure in the Directive was split into two parts focusing respectively on (1) credit servicers and credit purchasers (secondary markets) and (2) AECE, June 2019 saw the publication of a progress report5 by the Council. More recently, the assigned European Parliament's ECON committee finally rendered an opinion or more precisely two reports with proposed amendments, namely a Draft Report of November 20196 containing Amendments 1-203 (the Draft Report) and a Draft Report with Amendments 204648 of January 20207 (the Amendments Report). This means that in total 648 amendments were proposed, many made to serve a specific political agenda – notably from Matt Carthy (a Sinn Fein MEP from Ireland, who also sits as a substitute on the ECON Committee) and Dimitrios Papadimoulis (13th Vice President of the parliament, a Syriza MEP from Greece and a member of the ECON Committee). Both reports contain very few explanatory statements on the reasons for the said amendments. Out of the 648 amendments, we found 19 to be particularly important and these are analyzed below.
2 Dentons is a member of the EU Commission's Working Group on NPL Transaction Platforms and has also contributed to various sub-working groups
3 What is important to note is that the rapporteurs responsible for this EU Directive in the EU's influential Economic and Monetary Affairs (ECON) Committee of the European Parliament were Italy's Roberto Gualtieri (from the center-left S&D political grouping) who has been a critic of the ECB's and EBA's NPL Action Plans/efforts, as well as Esther de Lange (from the center-right EPP political grouping) from The Netherlands.
4 The legal basis for the AECE has also been assessed by the Court of Justice of the European Union (CJEU aka ECJ) as to its compatibility with the core of constitutional principles, EU competences and subsidiarity principles regulating the relationship between EU and national law as set out in the Treaty of Functioning on European Union (TFEU), in which the CJEU concluded that AECE could be compatible but just with a different part of the TFEU than those originally proposed.
5 Available here.
6 Available here.
7 Available here.
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