knowledge 2 February 2023 |

Credit Servicing: Consultation on Transposition of EU Directive

Introduction

The Department of Finance has published a consultation on the transposition of the EU Directive on Credit Servicers and Credit Purchasers (here).1 This is an important opportunity for persons interested in the non-performing loans (“NPL”) and/or credit servicing markets to provide their views on how the Directive should be transposed.

The consultation period runs from 24 January 2023 to 8 March 2023, with the Directive due to be transposed into Irish law and in effect by 30 December 2023. 

Background

Ireland already has a significant national credit servicing regime.  This arose in response to concerns that consumers and SMEs could lose regulatory protections as a result of the deleveraging of bank balance sheets, following the 2008/2009 financial crash.  The Directive, on the other hand, stems from a desire to foster the development of the EU’s capital markets union by reducing barriers to the trade of NPLs by EU credit institutions in particular.  While the two regimes do overlap their focus is different and the Irish regime is generally broader in its application.  For further background and an analysis of the Directive in the context of the Irish regime (as at the time the Directive was enacted), you can refer to our earlier briefing: here.

Scope of the Directive vs the Irish Regime

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

In-scope types of finance

Credit in the form of a deferred payment, a loan or other similar financial accommodation

Credit in the form of a deferred payment, cash loan or other similar financial accommodation (including the letting of goods) (“credit”).

Hire purchase agreements and “consumer-hire agreements” (e.g. finance leases) (“hire agreements”). 

“Borrower”

All types (but with a focus on consumers and SMEs)

Natural persons and, in the case of “credit”, certain corporate SMEs.

Seller

EU credit institution

Entity authorised to provide credit or hire agreements in the State2

Purchaser

No authorisation required – some obligations

Authorisation required for (i) holding legal title to a credit agreement/hire agreement, and/or (ii) making key decisions or setting strategy for the management of a portfolio of such 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/hire agreement
  • managing or administering a credit/hire agreement (including the activities within the Directive’s scope)
  • making of key decisions or setting strategy in relation to management of portfolio of credit/hire agreements 

Application in time

Applies to NPL sales by EU credit institutions after the legislation comes into effect.

Applies to existing and future credit agreements.


As is typical for legislation of this nature, there are also some important exemptions that parties may be able to avail of, depending on the relevant fact pattern (eg the Directive does not apply to credit servicing by a credit institution established in the Union or to certain authorised investment fund entities). 

What Questions are Being Consulted On?

The consultation proposes that (i) the existing Irish regime will be preserved for agreements that fall outside the scope of the Directive; and (ii) the Directive’s new requirements will apply to agreements within its scope.  The consultation also notes that, in addition to the obligation to transpose the minimum requirements of the Directive, Member States have been given discretion in relation to a limited number of matters.  The approach that Ireland should take to these matters forms the basis of the questions posed for consultation.

Those questions are as follows and (with the possible exception of question 1) each of them is likely to be of interest to any business engaged in the NPL or credit servicing markets. 

 

Question 1

(Article 2(6) discretion)

Do you think that Ireland should exclude public notaries, bailiffs and lawyers from the application of the Directive as transposed into Irish law?

Question 2

(Article 6(1) discretion)

Do you think that credit servicers authorised in Ireland under this Directive should be allowed to receive and hold funds from borrowers, or should be prevented from doing so?

Question 3

(Article 11(4) discretion)

Do you think that Ireland should require credit servicers to keep and maintain relevant records for a period of more than five years after the termination of a credit servicing agreement with a credit purchaser?

Question 4

(Article 17(1) discretion)

Do you think that Ireland should exercise this discretion3 and provide that EU based credit purchasers should appoint credit servicers under this EU framework in respect of credit agreements other than non-performing agreements concluded with consumers?

Question 5

(Article 17(4) discretion)

Do you think Ireland should exercise this discretion to allow natural persons to service credit agreements which fall within the scope of this Directive?

Question 6

(Article 17(5) discretion)

Do you think Ireland should allow a credit servicer to comply, on behalf of the credit purchaser, with the obligations of the credit purchaser including in relation to credit registers?

Question 7

(Article 27 discretion)

Do you think Ireland should exercise this discretion4 and not provide for all of the identified forbearance measures in the transposition of the new Article 16a of the Consumer Credit Directive?

Question 8

(Article 27 discretion)

Do you think that Ireland should allow creditors to (i) define and impose charges on a consumer arising from default, (ii) if so, require that that those charges shall be no greater than is necessary to compensate the  creditor  for  costs  it  has  incurred as  a  result  of  the  default, (iii) allow creditors to impose additional charges on the consumer in the event of default and (iv) if the answer to (iii) is in the positive, what cap should be placed on those charges?

Question 9

(Article 28 discretion)

Similar to Question 7, do you think Ireland should exercise this discretion and not provide for all of the identified forbearance measures in the  transposition  of  the  amendment  to  Article  28  of  the  Mortgage  Credit Directive?

Question 10

(Article 32(2) discretion)

Do you think that Ireland’s existing national authorisation and regulatory regime in respect of credit servicing firms (i) is equivalent to, or stricter than, those established in this Directive for credit servicing activities and (ii) if so, should such regulated entities be automatically recognised as authorised credit servicers?


Comment

Many of the questions posed for consultation are likely to be of material importance to potential NPL sellers/purchasers and credit servicing firms.  For example, it would be important for existing credit servicing firms to ensure they reply to Question 10 with a view to having their existing Irish authorisations automatically recognised for the purposes of the new EU regime.  Given the scale and depth of experience of credit servicing firms in Ireland, the ability to passport that authorisation across the EU should offer an interesting opportunity for new business. 

In addition to considering the questions posed by the consultation, credit servicing firms and credit sellers/purchasers should consider how the new requirements of the Directive can best be factored into any proposed NPL sales by EU credit institutions on or after 30 December 2023.

  1. Directive (EU) 2021/2167 of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU.
  2. 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 the provision of credit and/or hire agreements to natural persons (not just consumers) requires authorisation in almost all instances.
  3. Article 17(1) contains a discretion which would allow host Member States to require EU based credit purchasers to appoint a credit servicer in relation to credit agreements other than those concluded with consumers.
  4. Article 27 (amending the EU Consumer Credit Directive) requires creditors to have adequate policies and procedures in relation to exercising reasonable forbearance before taking enforcement proceedings. The Directive, however, states that its list of potential forbearance measures is without prejudice to rules set out in national law and that it “does not require Member States to provide for all those measures in their national law”.

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.