The long-awaited bill on regulatory protection following loan book sales was published on 14 January 2015. The bill, which is entitled the “Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (Bill), seeks to address concerns regarding the loss of regulatory protections for borrowers when loans are sold to an unregulated entity. In doing so it amends the Central Bank Acts 1942 to 2014 in several respects.
Consumers and SMEs who borrow from regulated entities enjoy a number of regulatory protections including protections under the Central Bank’s Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the Code of Conduct for Business Lending to Small and Medium Enterprises (Codes). In addition, eligible customers of a regulated entity have the right to complain to the Financial Services Ombudsman (FSO) about that entity’s conduct.
Some or all of these protections may be lost if the relevant loan book is sold by the regulated entity to an unregulated one. Such sales have become increasingly common as credit institutions seek to strengthen their balance sheets by deleveraging or as part of a restructuring of business. While an unregulated purchaser can voluntarily apply the Codes when managing loan books, voluntary compliance is not enforceable. Moreover, customers of unregulated entities do not have access to the FSO.
The Bill aims at ensuring that borrowers retain all their regulatory protections in the event of a loan sale from a regulated entity, including a credit union, to an unregulated one. As its title suggests, the Bill seeks to achieve this aim through regulating “credit servicing firms”, namely firms which manage or administer the credit agreement with the consumer or SME on behalf of the unregulated purchaser on an outsourced basis. It also regulates the activity of “credit servicing” so that an entity that does not outsource the service will itself have to be regulated to conduct that service. In addition, the Bill provides that eligible borrowers whose credit agreements are being serviced will have a right of access to the FSO. The Bill covers lending to SMEs including SPVs, as well as syndicated lending and intra- group lending.
In choosing to regulate the activity of “credit servicing”, the Bill departs substantially from the Consultation Paper on consumer protection on the sale of loan books, published by the Department of Finance in July 2014. In that paper, the Department proposed to regulate the ownership of credit by way of requiring an owner of a loan book to become authorised as a retail credit firm when engaged in loan book servicing activities. However, the Department subsequently abandoned that approach as the consultation process highlighted a problem in applying it in instances involving passive special purpose vehicles.
Regarding existing credit servicing firms or firms carrying out the activity of credit servicing, the Bill provides for transitional provisions which essentially confer a three month grace period in which to apply for authorisation. However, the transitional arrangements do not expressly deal with situations where action has commenced against a consumer, or where a consumer has a complaint about conduct which occurred prior to the commencement of the Bill.
The Bill is expected to progress through the Houses of the Oireachtas in the early part of 2015. If and when it comes into force, it will have significant implications for both credit servicing firms and those providing credit servicing activities. It also means that new non-bank lenders to SMEs must be regulated or appoint a regulated servicer. It should be noted that a number of issues arise regarding the application of the Bill to SMEs, which will hopefully be clarified during the course of the legislative process.
All currently unregulated entities managing or administering credit agreements will need to consider how the Bill is likely to impact on them, including loan book purchasers who have chosen not to outsource their credit servicing. Providers of credit should also give the Bill careful consideration.
The Bill may be accessed here.