EU Credit Servicing Directive: What will it mean for Ireland?
Since 2015 Ireland has had national laws on credit servicing, designed to ensure that all regulatory protections afforded to SMEs and natural persons travel with a loan on its transfer.
The credit servicing regime has evolved a number of times, expanding its scope to include holding legal title to in-scope loans and the setting of strategies for, and taking of key decisions in respect of, portfolios of in-scope loans.
That regime is due to be changed again, both at a national level (see our separate briefing here) and at EU level when the proposed Directive on credit servicers and credit purchasers (the “Directive”) is enacted and transposed.
This briefing considers the proposed Directive (based on the latest text following political agreement by the EU legislature earlier this year – here) and, in particular, how it may affect Ireland’s credit servicing regime.
The Directive forms part of the EU’s efforts to create a robust Banking Union and Capital Markets Union. More specifically, a key objective of the Directive is to promote the development of a secondary market for EU bank originated non-performing loans. It aims to achieve this by proposing a common set of rules that will apply to third party credit servicers operating in the European Union.
Significantly, the Directive contemplates that a credit servicer authorised in one Member State will be permitted to exercise passport rights and provide those services on a cross-border basis into other Member States.
In contrast to the current Irish credit-servicing regime, the Directive does not impose a direct obligation on the part of a purchaser to obtain an authorisation and, instead, mandates that the relevant third party servicer must be authorised.
A further important difference between the Directive and the current Irish credit servicing regime is that the Directive applies to all relevant non-performing loans originated by an EU credit institution (whether or not the borrower is an SME or a natural person), whereas the current Irish regime applies to a transfer of in-scope performing and non-performing loans originated by any regulated lender (eg including retail credit firms, not just bank lenders), but only where that loan is advanced to an SME or a natural person.
Scope of Credit Servicing Directive
The Directive applies to “credit servicers” and “credit purchasers” in relation to:
- non-performing1 credit agreements in relation to credit “…in the form of a deferred payment, a loan or other similar financial accommodation”;
- issued by a “credit institution” (within the meaning of the Capital Requirements Regulation) established in the European Union.
The Directive expressly excludes servicing carried out by:
- a credit institution established in the Union;
- a duly authorised AIFM, UCITS management company or investment company (provided the investment company has not appointed a management company);
- a non-credit institution subject to supervision by a competent authority2: in Ireland this could include a variety of entities such as retail credit firms, credit unions and moneylenders; and
- servicing carried on by a natural person (in practice, likely very rare).
While the Directive lays down a common European framework and requirements in relation to the above, it also specifically provides that it does not affect any restrictions in a Member State’s laws in relation to a non-performing credit agreement that “…is not past due, is less than 90 days past due or is not terminated in accordance with national civil law…”, nor does it affect the “…transfer of such a non-performing credit agreement.”.
Interaction with the Irish regime
The Directive states that it lays down a common framework and requirements for credit servicers and credit purchasers. While it remains to be seen how the Irish legislature will transpose the Directive it seems likely that:
- matters expressly within the scope of the Directive will be interpreted as requiring maximum harmonisation across Member States ie Ireland’s credit servicing regime will need to be changed to match the Directive;
- however, for matters not covered by the Directive, Member States will be free to continue to operate a national regime.
Given the motivation for the Irish credit servicing regime was consumer and SME protection, Ireland may continue to regulate credit servicing in relation to matters not covered by the Directive. The current proposals for an expansion of the Irish regime set out in the General Scheme of the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (discussed here) could be read as an indicator that this will be the case. However, implementation of the Directive may also provide Ireland with an opportunity to streamline the current regime and remove some potential complexity, without diminishing consumer protections, especially given the negotiated text of the Directive emphasises consumer protection measures.
For indication purposes, we have set out below a high level comparison of the scope of (i) the EU Directive, and (ii) the current Irish regime.
|Scope / Impacted Party||EU Directive||Irish Credit Servicing Regime – Current|
|In-scope types of Credit||Credit in the form of a deferred payment, a loan or other similar financial accommodation||Cash loan|
|Borrower||All types (note additional obligations apply in relation to consumers and SMEs)||Natural persons and SMEs|
|Seller||Credit institution only||Entity authorised to provide credit in the State3|
|Purchaser||No authorisation required – some obligations||Authorisation required for (i) holding legal title to a credit agreement, and (ii) making of key decisions or setting strategy in relation to management of portfolio of credit agreements.|
|Credit servicer||Authorisation required||Authorisation required|
|Credit servicing scope||- collection/recovery of payments from borrowers
- renegotiating terms and conditions with borrowers
- dealing with complaints
- telling borrowers about changes to interest rates, charges or payments due
|- holding legal title to a credit agreement
- managing or administering a credit agreement (including the activities within the Directive’s scope
- making of key decisions or setting strategy in relation to management of portfolio of credit agreements
|Application in time||Applies to NPL sales after the legislation comes into effect.||Applies to existing and future credit agreements.|
The final form of the Directive is expected to be published in the Official Journal of the European Union before the end of 2021. The Directive would be required to be transposed and in force in Ireland within 24 months.
All parties currently involved with the Irish credit servicing regime should keep a close eye on how the Irish legislature seeks to accommodate the EU Directive. For Irish-based credit servicing firms with scale, the possibility of exercising passport rights on a cross-border basis may be an attractive proposition. Given the original drive for the Irish regime was the protection of consumers and SMEs it seems unlikely that existing credit servicing obligations will be rolled back any further than is required to comply with the Directive (unless it is decided that it is appropriate to streamline the local regime for performing loans to some degree in order to reflect how non-performing loans will treated under the Directive). This opens up the possibility of dual-regimes: (i) a somewhat simplified EU-wide regime for credit servicing within the scope of the Directive, alongside (ii) an amended version of the existing Irish regime for credit outside of the Directive’s scope. While no doubt creating some complexity, the introduction of the European-wide regime – focused as it is on balancing the efficient sale of NPLs with customer protection – will be welcomed and an important step in achieving the EU’s banking and capital market goals.
- Defined as a credit agreement that is classified as non-performing exposure in accordance with Article 47a of the Capital Requirements Regulation (EU 575/2013).
- Specifically where such supervision is required in accordance with the requirements of the Directive on consumer credit agreements (Directive 2008/48/EC, transposed into Irish law by the European Communities (Consumer Credit Agreements) Regulations 2010) or the Mortgage Credit Directive (Directive 2014/17/EU, transposed into Irish law by the European Union (Consumer Mortgage Credit Agreements) Regulations 2016).
- For completeness, the credit servicing regime only refers to the creditor being authorised in the State in relation to SME borrowers. No such specific reference is made in the case of natural person borrowers but this is generally an academic point given that cash loans to natural persons (not just consumers) require authorisation in almost all instances.
This document has been prepared by McCann FitzGerald LLP 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.