Financial Services Update: New Rules for Investors in Irish Bank Assets to Come into Effect in January 2019
19 December 2018
The Consumer Protection (Regulation of Credit Servicing Firms) Bill 2018 has completed its legislative journey through the Irish Parliament with the passing of the Bill by the upper house, Seanad Éireann on 18 December 2018.
The Bill was brought forward with the aim of regulating private equity firms who acquire consumer loans.
New licencing requirements
Until now, purchasers of loan portfolios have tended to avoid licencing by the Central Bank of Ireland (CBI) by appointing a regulated credit servicer, which in turn is subject to rules protecting borrowers.
This will change under the new regime. In particular, the Bill requires purchasers of legal title to relevant loans to become regulated. The Bill achieves this by expanding the definition of credit servicing to include:
- Holding the legal title to credit granted under the credit agreement
- Determining the overall strategy for the management and administration of a portfolio of credit agreements
- Maintenance of control over key decisions relating to such portfolio
This means that existing unregulated loan purchasers will be required to examine their acquisition and holding vehicles to ensure that the appropriate parties are suitably authorised by the CBI, depending on how the assets are held and/or serviced. Where an entity is deemed to be “credit servicing” as a result of the expanded provisions of the Bill, that entity will be “taken to be authorised” provided that entity:
- Applies to the CBI for authorisation within three months of the commencement of the Bill, and
- Currently has a regulated credit servicing firm appointed
The CBI has not yet commented on the passing of the new legislation and whether any abbreviated authorisation process for these firms will be introduced or whether they will need to go through the full credit servicing licencing process.
It is worth noting that the Bill contains a carve-out with respect to securitisation special purpose vehicles which has the effect of allowing standard securitisations to remain outside of the authorisation requirements set out in the Bill.
Conflict with European proposal
The Bill appears to conflict with a European proposed directive on credit servicers and credit purchasers which aims to address the problem of high levels of NPLs in European banks. This proposal explicitly states that Member States shall ensure that credit purchasers are not subject to any additional requirements for the purchase of credit agreements other than as provided for under the proposed directive. Neither House of the Oireachtas addressed this conflict when debating the Bill.
In fact, an opinion dated 5 July 2018 from the European Central Bank strongly queried the legislative proposal noting that the draft Bill “may raise issues of legal certainty”, that “the impact of the draft law, and the role of the CBI, are not clear” and that “the draft law is being introduced without the benefit of a thorough impact assessment”. It does not appear that these issues were addressed in any detail during the passage of this legislation through the various committee stages.
Similarly, the fact that the CBI itself has concluded in its recent “Report on the Effectiveness of the Code of Conduct on Mortgage Arrears in the context of the Sale of Loans by Regulated Lenders” that, for borrowers who engage with their lenders, the Code is "working effectively and as intended". It also repeated the fact that the protections of that code travel with the loan and that it continues to apply where the loan is purchased by a private equity fund, as the loan must be serviced by a Bank, Retail Credit Firm, or Credit Servicing Firm, regardless of the introduction of the Bill.
The Government has indicated that it expects enactment and commencement of the Bill in early January 2019.
The passing of the Bill could have significant impact on the operations of investors in Irish banking assets and the manner in which they structure acquisitions of loan portfolios. Parties who have invested in Irish bank assets, or intend to in the future, should examine the financing and ownership structures of both historic and future loan sale transactions to ensure compliance with the new rules.
For more information on the potential impact of this legislation, contact a member of our Financial Services team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.