Insolvency Update: Irish Protection of Non-performing Borrowers – A Step Too Far for the EU?
03 February 2020
Prior to 2015, the Central Bank of Ireland regulated the originators of retail loans but did not regulate the acquirers of loans or those providing services to them.
The introduction of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015:
- Required credit servicing firms to be regulated
- Required the acquirers of loans either to be a regulated firm or to engage a regulated credit servicing firm, but
- Did not regulate the acquirers of loans who had engaged a credit servicing firm to engage with borrowers
The Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 (the 2018 Act) brought the acquirers of loans to consumers into the same regulatory regime applicable to credit servicing firms. The 2018 Act was debated against the backdrop of pending EU legislative reform, discussed below, with which it was clearly not entirely compatible.
Proposed EU Directive
In March 2018, the European Commission presented a package of measures to address the high level of non-performing loans (NPLs) in Europe. The package includes a proposed Directive on credit servicers, credit purchasers and the recovery of collateral (the NPL Directive). The NPL Directive aims to stimulate demand for NPL’s by generating a larger and more diverse investor base and create greater competition among investors and loan servicers. The NPL Directive also seeks to create equal treatment across Member States. In essence, the objective of the NPL Directive is to prevent the excessive build-up of NPL’s on banks' balance sheets in the future and thereby contribute to EU financial stability.
While the NPL Directive requires the purchasers of performing credit to be regulated it does not require the regulation of purchasers of non-performing credit. This is clearly inconsistent with the 2018 Act which requires all holders of credit to be regulated.
The divergence between the 2018 Act and the NPL Directive
A Post Enactment Report in relation to the 2018 Act, published by the Department of Finance in December 2019 notes that the NPL Directive is not consistent with the 2018 Act because:
“while the Directive requires the purchasers of performing credit to be regulated which is consistent with our legislation, it does not require the regulation of purchasers of non-performing credit which is not consistent as our legislation requires all holders of credit to be regulated.”
The NPL Directive will not be finalised until later this year however, when the final version is agreed, Member States will be obliged to adopt and publish, the laws, regulations and administrative provisions necessary to comply with the NPL Directive and apply those provisions from 1 January 2021 onwards.
We believe that the introduction of a level playing field across the EU in relation to the market for NPLs, and the removal of certain aspects of the regulation of this market from Member States, will be welcomed by both sellers and acquirers of loans as it will likely be more focused on systemic risk management and free movement of capital and therefore less affected by local political considerations.
If adopted in its present form, the NPL Directive would actively restrict the manner in which the 2018 Act regulates the acquirers of NPLs in Ireland and would need to be amended to align with EU law.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
Commenced in its entirety on 21 January 2019.