knowledge | 18 December 2015 |
Credit Servicing Firms – Authorisation Requirements and Standards
Credit servicing firms and lenders take note, the Central Bank of Ireland (the “Central Bank”) has published its Authorisation Requirements and Standards for Credit Servicing Firms (“Requirements and Standards”). This document sets out the authorisation requirements applicable to credit servicing firms both at the time of authorisation and on an on-going basis, as well as certain other applicable regulatory requirements. The Central Bank has also published frequently asked questions on credit servicing (“FAQs”).
As set out in our previous briefing, (available here), the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “2015 Act”) seeks to ensure that those who enter into a credit agreement with a regulated entity retain their regulatory protections in the event that the agreement is subsequently sold to an unregulated third party.
In order to achieve this goal, the 2015 Act introduces
a new regulatory regime for credit servicing firms which essentially subjects
them to the provisions of Irish financial services law that apply to “regulated
financial service providers” (“RFSPs”), including in particular, the various
statutory codes issued by the Central Bank (“Codes”). Under the 2015
Act, any agreement entered into between a RFSP and a relevant borrower must be
serviced by a credit servicing firm, including where the agreement is subsequently
sold to an unregulated third party.
The 2015 Act entered into force on 8 July 2015.
Shortly afterwards, on 14 July 2015, the Central Bank published Consultation
Paper CP96 on the Authorisation Requirements and Standards for Credit Servicing
Firms and Consequential Amendments to Statutory Codes (“CP96”). This consultation
closed on 30 September 2015 and, on 10 December 2015, the Central Bank published
its Requirements and Standards, as well as its Feedback to CP96.
Overview of Requirements and Standards
The Requirements and Standards sets out the authorisation requirements imposed on a credit servicing firm both as a condition of authorisation and for the on-going conduct of its business. These requirements can broadly be categorised as follows; general requirements, professional indemnity insurance, organisation and management, IT systems, relationship with the Central Bank, audited accounts and ongoing reporting, ownership, outsourcing, relationship with loan owners, other places of business and record keeping.
General Requirements – in common with other
RFSPs, a credit servicing firm must be able to demonstrate that its business is
structured in such a way that it is capable of being supervised by the Central
Bank and that adequate and effective control of the firm rests in the State. In
addition to the factors which the Central Bank typically takes into
consideration in this regard, such as where the firm’s mind and management is
located, the Central Bank will also consider how the credit servicing firm
intends to engage with borrowers, including, in particular, the practical resolution
facilities that will be made available to borrowers in arrears.
Professional Indemnity Insurance – a
credit servicing firm must have professional indemnity insurance that provides
a minimum cover of €1.25 million per claim and €1.85 million in aggregate cover
in a single policy period with regard to its credit servicing business. This
requirement does not apply to credit servicing conducted on behalf of a RFSP that
is authorised to provide credit in the State (such as banks) because in such
cases the RFSP will be responsible for ensuring that the borrower benefits from
the various regulatory protections.
Organisation and Management – a credit
servicing firm must be able to conduct its affairs in a manner that ensures
that its customers’ best interests are protected. This includes having robust governance
arrangements and adequate staff in place, as well as a compliance function and
an internal audit function. The credit servicing firm must have sufficient resources
to be able to conduct its business in accordance with regulatory requirements,
however, the Requirements and Standards do not impose a capital requirement on
credit servicing firms.
IT Systems – a credit servicing firm
must have in place adequate IT systems capable of meeting any relevant
obligations under any applicable Code. It must also have procedures in place to
mitigate risks associated with its IT systems, including effective business
continuity and disaster recovery procedures.
Relationship with Central Bank – the Requirements
and Standards contain a number of provisions aimed at ensuring that the
relationship between a credit servicing firm and the Central Bank is a
constructive one. Credit servicing firms should note in particular that the Central
Bank has included a notification requirement pursuant to which each credit servicing
firm must notify the Central Bank before taking on a new loan portfolio or
client which results in it conducting credit servicing activities. This notification
requirement does not apply where the credit servicing is being conducted by a RFSP
authorised to provide credit in the State.
Audited Accounts and On-going Reporting –
a credit servicing firm must make available audited accounts and any applicable
auditor’s report to the Central Bank upon request. It must also comply with any
Central Bank reporting requirements.
Ownership – a credit servicing firm
must give the Central Bank advance notice where there is a proposed material
change in its ownership. In cases where the firm is unable to give such notice
(eg, where a change of ownership relates to a parent of a regulated
entity which is a plc and whose shares are publicly traded on a listed stock exchange),
it should give notice as soon as it becomes aware of the change.
Outsourcing – a credit servicing firm must
not outsource activities to an extent that would impact on its ability to meet all
regulatory requirements. Significantly, each firm must notify the Central Bank:
- in advance, where it proposes to outsource any important operational function relating to the provision of credit servicing; and
- as soon as possible where a material change occurs or is due to occur in an outsourcing arrangement governing an important operational function relating to the provision of credit servicing.
In addition, a credit servicing firm must give advance written
notice to a customer regarding any third party contacting the customer on the
Relationship with Loan Owners – a credit
servicing firm must give written information of its obligations under financial
services legislation to the holder of legal title over loans for whom it acts.
Other Places of Business – before operating
from a place of business other than its head office, a credit servicing firm
must seek the Central Bank’s prior approval, and notify it at least 14 days in advance
of the nature of the services to be provided from the other place of business and
the names of those responsible for managing it.
Record Keeping – each credit servicing
firm must keep appropriate records regarding its credit servicing business and notify
the Central Bank in writing of the address where those records are kept.
The FAQs – Notice Requirements
The FAQs set out the responses to a number of questions dealing with the background to the 2015 Act and its scope. Significantly, the FAQs deal with the application of provision 3.11 of the Central Bank’s Consumer Protection Code 2012 (“CPC”), which requires a regulated lender to provide advance notification to both the Central Bank and affected consumers where it intends to transfer all or part of its “regulated activities”. According to the FAQs, this provision means that the original lender must provide a consumer with at least 2 months’ notice before transferring all or part of its loan book covered by the CPC to another person including where the transferee is an unregulated entity. Where the transferee is an unregulated entity, the regulated lender must also notify the consumer of the regulated entity that will be ‘servicing’ the loan for the unregulated entity.
In the event that there is a change in the credit
servicing firm, the existing credit servicing firm must also notify the Central
Bank and the consumer at least two months in advance.
Comment and Next Steps
As set out in our briefing of 29 July 2015, the 2015 Act has a number of far-reaching implications for all those carrying on credit servicing activities with respect to cash loans to individuals and small and medium enterprises, including primary and master servicers. While the Requirements and Standards are largely in line with those imposed on other RFSPs, the legal owners of loans and credit servicing firms should take particular note of the various notification requirements imposed under the Requirements and Standards and under the CPC.
One additional matter addressed in the responses
to CP96 is the extent to which the CPC applies to financial institutions, multi-lender
transactions and special purpose vehicles. While these types of entities are
explicitly excluded from the Code of Conduct for Business Lending to Small and
Medium Enterprises, there is no equivalent exclusion from the CPC. This means
that, depending on the type of entity involved, it may fall within the specific
obligations imposed by the CPC regarding the provision of financial services to
consumers with resulting implications for the lender and credit servicer. While
the Central Bank does not address this matter in the Requirements and
Standards, it has indicated that it will consider amending Chapter 1 of the CPC
to exclude such entities from its scope in the context of a wider review of the
Applicants seeking authorisation under the 2015
Act must submit a completed Application Form for Authorisation as a Credit
Servicing Firm (Stage 1) and a completed Individual Questionnaire in respect of
each person proposed to hold a Pre-Approval Controlled Function. In addition,
the Central Bank will shortly publish a Stage 2 supplemental Application Form
and Guidance Note to take account of the Requirements and Standards. Applicant firms
will also be required to complete a Stage 2 Application.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.