In December 2015, the Central Bank of Ireland (the Central Bank) released its Authorisation Requirements and Standards for Credit Servicing Firms (the Standards).
The Standards follow the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the Act) which introduced a new regulatory regime for credit servicing firms and the new regulated activity of credit servicing.
The Act was primarily introduced to ensure that borrowers will have the same regulatory protections throughout the duration of their loan, even if their loan is sold to a third party.
Part A of the Standards consists of the authorisation requirements that must be complied with in order to be authorised by the Central Bank as a credit servicing firm. Part B of the Standards relates to other regulatory requirements, but we emphasise that this list is not exhaustive, and credit servicing firms could be subject to other regulation by virtue of their status as a regulated financial services provider.
Before the Central Bank will grant authorisation as a credit servicing firm, the applicant is required to show that it meets the Standards.
Examples of some of the requirements of the Standards are as follows:
- the applicant can show that its business structure is capable of supervision by the Central Bank;
- the applicant has professional indemnity insurance covering its credit servicing business;
- the applicant can demonstrate that its affairs are conducted in a way that ensures the protection of the best interests of its customers;
- the applicant must have robust governance arrangements, adequate staffing levels, adequate IT systems and an internal audit function; and
- the applicant must have a good relationship with the Central Bank and provide the Central Bank with updated, accurate information as is necessary.
The applicant seeking authorisation as a credit servicing firm will also need to produce a Business Plan and Programme of Operations. The Central Bank is offering an optional pre-application meeting to applicants where they can ask specific questions about any aspect of the application process and the application forms.
Part B of the Standards lists the legal and regulatory requirements that the Central Bank has indicated that credit servicing firms must adhere to. These include:
- Consumer Protection Code 2012;
- Code of Conduct on Mortgage Arrears 2013;
- Code of Conduct for Business Lending to Small and Medium Enterprises 2012;
- Fitness and Probity requirements;
- Central Bank Act 1942 in relation to the annual levy charged by the Central Bank; and
- Minimum Competency Code 2011.
Where relevant, the credit servicing firm must comply with the above Codes of Conduct or provisions, however, as noted above, the Central Bank has stated that this list is non-exhaustive.
Several firms that were carrying out credit servicing prior to the enactment of the Act have availed of transitional arrangements under the Act allowing them to continue their credit servicing activity. The Central Bank has now stated that these firms will be assessed under the Standards before a determination is made whether to grant them authorisation as a credit servicing firm.
Additions to the Central Bank's Codes of Conduct
As noted above, credit servicing firms are subject to several of the Central Bank's Codes of Conduct. In connection with the formulation of the Standards, the Central Bank has recently updated the following codes to include reference to credit servicing firms and the regulated activity of credit servicing:
- Consumer Protection Code;
- Code of Conduct on Mortgage Arrears;
- Code of Conduct for Business Lending to Small and Medium Enterprises; and
- Minimum Competency Code.
How will the new Codes of Conducts and Standards affect a Loan Owner?
Under the Standards, the loan owners' relationship with the credit servicer is put on a regulatory footing. In particular, the credit servicing firm is required to write to the holder of legal title over loans for whom it acts, outlining the credit servicing firm's obligations under financial services legislation. This includes any Codes of Conduct that apply to the credit servicing firm. The credit servicing firm must be able to show how its agreement with the loan owner ensures compliance with its obligations under financial services legislation. In practice, we would expect agreements between loan owners and credit servicing firms to include a number of covenants related to regulatory compliance.
How will the new Codes of Conducts and Standards affect a consumer?
A consumer must be given two months' notice before a regulated lender transfers part or all of its loan book to another person. In the event that the transferee of the loan book is not regulated, the Central Bank's Consumer Protection Code requires that the regulated lender notifies the customer of which regulated entity will be servicing the loan.
Credit servicing firms should evaluate whether they need to make any changes to their internal systems or policies in order to ensure compliance with the Standards. An evaluation of resources, policies, staff, IT systems and insurance are among the areas that a credit servicing firm should review following the introduction of the Standards.