Credit servicing firms are now regulated by the Central Bank of Ireland (“Central Bank”) following the entry into effect of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “2015 Act”), on 8 July 2015. On 14 July 2015 the Central Bank published a consultation paper in which it outlines its intended approach to the authorisation and on-going regulation of credit servicing firms.
The new regulatory framework for credit servicing firms has clear implications for all those carrying on credit servicing activities with respect to cash loans to individuals and small and medium enterprises ("SMEs"), including primary and master servicers. It also has implications for retail credit firms which were previously exempt from the authorisation requirements under Part V of the Central Bank Act 1997 (“1997 Act”), by virtue of s. 28(a) of that Act (“exempt retail credit firms”). More broadly, the 2015 Act will require the holder of legal title to relevant loans, whether or not it is a regulated financial service provider (“RFSP”) carrying out lending in Ireland, to consider its service agreements in light of the new requirements.
Over the past years, the Irish market for loan portfolio sales has been very active, with portfolio sales in excess of €30bn in 2014. However, concerns have also arisen regarding the effect of these sales on borrowers. Specifically, consumers and SMEs whose loans were sold by a regulated entity to an unregulated one lost their regulatory protections following that sale. This was widely considered to be inequitable.
In July 2014 the Department of Finance published a public consultation paper “Consumer Protection on the Sale of Loan Books”, in which it outlined its intention to introduce legislation regulating the ownership of credit. In January 2015 it published the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015, which departed substantially from the approach outlined in the Consultation Paper: instead of regulating the ownership of credit, it regulated the activity of “credit servicing”. While in its original form the Bill applied to all credit agreements irrespective of whether or not the original lender was a RFSP, it was subsequently amended so as to exclude from its scope SME loans originally entered into with an unregulated lender.
The 2015 Act: Overview
As mentioned, the purpose of the 2015 Act is to ensure that those who enter into a credit agreement with a regulated entity retain their regulatory protections in the event that the agreement is subsequently sold to an unregulated third party. In order to realise this purpose, the 2015 Act amends Part V of the 1997 Act to provide for a regulatory regime for credit servicing firms, namely certain firms which carry out the activity of “credit servicing”.
The 2015 Act defines credit servicing as managing or administering a credit agreement in respect of a cash loan entered into between, on the one hand, a creditor and on the other, a “relevant borrower”, a term which covers both consumers and SMEs that entered into the credit agreement with a RFSP. Credit servicing encompasses a range of activities including:
- notifying the relevant borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the borrower to be notified;
- taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower; and
- managing or administering a number of matters under or in relation to the credit agreement, including repayments, charges, errors, complaints, information or records; restructuring; and assessing the relevant borrower’s financial circumstances and ability to repay under the credit agreement. It also includes communicating with the relevant borrower in respect of these matters.
The following activities do not constitute credit servicing:
- determining the overall strategy for the management and administration of a portfolio of credit agreements;
- maintaining control over key decisions relating to such portfolios; or
- taking any necessary steps to enable another person to undertake credit servicing or to enforce a credit agreement,
provided that these activities are not conducted in a way that would be a prescribed contravention if they were carried out by a RFSP.
Credit Servicing Firms
An entity that carries out the activity of credit servicing will fall within the scope of the 2015 Act where it does so either:
- on behalf of an unregulated entity, (ie one which is not regulated within the EEA as a financial service provider); or
- on its own behalf, in circumstances where it holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by an authorised credit servicing firm.
A RFSP that is authorised to lend in Ireland, whether by the Central Bank or another EEA regulator on a passporting basis, is itself taken to be authorised to carry on the business of a credit servicing firm and will not have to apply for specific authorisation.
Exempt Retail Credit Firms
Prior to the entry into force of the 2015 Act, a RFSP was excluded from the definition of a retail credit firm by virtue of s. 28(a) of the 1997 Act: consequently, it did not require authorisation as a retail credit firm to lend to a natural person. The 2015 Act narrows the scope of that exemption so that it now only applies to a RFSP authorised to provide credit in the State whether by the Central Bank or on a passporting basis. This means that a RFSP that is authorised for some other purpose will now need to be authorised as a retail credit firm before lending to a natural person.
The 2015 Act provides for transitional provisions for existing exempt retail credit firms and credit servicing firms. Specifically, these firms may continue to carry on retail credit/credit servicing activities provided that they apply to the Central Bank for authorisation as a retail credit/credit servicing firm no later than 3 months after the 2015 Act enters into operation. Persons seeking to avail of these transitional arrangements are therefore required to have completed and submitted an application for authorisation to the Central Bank by 8 October 2015 in order to continue to provide such services.
It is an offence for a person to carry on any regulated business unless they are the holder of an authorisation. In addition, under the 2015 Act, it is an offence for the holder of legal title to credit granted under a credit agreement to instruct a credit servicing firm to take or fail to take an action, if this would otherwise be a prescribed contravention if undertaken by a retail credit firm. A person who commits this offence is liable:
- on summary conviction, to a Class A fine and/or imprisonment for a term not exceeding 12 months; or
- on conviction on indictment, to a fine not exceeding €250,000 and/or imprisonment for a term not exceeding 5 years.
On 14 July 2015 the Central Bank issued a consultation paper in respect of its proposed Authorisation Requirements and Standards that applicants seeking authorisation as a credit servicing firm must satisfy both at the time of authorisation and on an on-going basis.
The consultation paper also outlines a number of proposed consequential amendments to the Central Bank Statutory Codes of Conduct in order to apply those codes to credit servicing firms. The consultation closes on 30 September 2015.
The Central Bank’s proposals regarding its Authorisation Requirements and Standards require each credit servicing firm to:
- demonstrate that its business structure is organised in a such a way that it is capable of being supervised by the Central Bank and that adequate and effective control of the firm rests in the State;
- provide the Central Bank with written confirmation from its insurer that it has effected a Professional Indemnity Insurance policy providing a minimum coverage of €1.25 million per claim and €1.85 million in aggregate cover in a single policy period with regard to its credit servicing business;
- be able to demonstrate that it has sufficient resources to conduct its business in a manner that ensures that its customers’ best interests are protected. This includes being able to demonstrate its capacity to withstand
potential shocks such as the loss of a key client or the occurrence of a significant business continuity event. A credit servicing firm may also be required to procure an independent third party review of its operations, systems and controls to provide the Central Bank with assurance that the requisite operations, systems and controls are in place in the firm and functioning as described;
- have in place an adequate IT system to conduct its business including adequate governance/controls to mitigate IT risk and business continuity arrangements in respect of IT systems;
- inform or notify the Central Bank, including: where any change affects the accuracy of information contained in its application for authorisation; when taking on a new loan portfolio or client; and in respect of any proposed material change of ownership; and
- give advance notification to the Central Bank if it intends to outsource any important operational functions relating to the provision of credit servicing or if there is a material change in an outsourcing arrangement governing an important operational function. A credit servicing firm must be able to demonstrate that its outsourcing arrangements do not adversely impact its regulatory obligations.
As mentioned, the 2015 Act has far reaching implications. In particular it means:
- a third party servicer, whether primary or master, that provides credit servicing on behalf of a loan’s legal owner must be authorised as a credit servicing firm;
- a legal owner of a loan (including an SPV) must either itself be authorised as a credit servicing firm or appoint an authorised credit servicing firm to service the loan;
- banks, including passporting EEA credit institutions, retail credit firms and others authorised to lend in Ireland are automatically deemed by the 2015 Act to be themselves authorised as a credit servicing firm; and
- a RFSP that is not authorised to carry out lending in Ireland, whether by the Central Bank or on a passporting basis, must now become authorised as a retail credit firm before lending to a natural person.
With the exception of a RFSP that is deemed authorised under the 2015 Act, all firms intending to carry out the activity of credit servicing must now apply for and obtain Central Bank authorisation before doing so. Credit servicing firms which were carrying out credit servicing activities when the 2015 Act entered into effect on 8 July 2015 must apply to the Central Bank for authorisation by 8 October 2015.
Details of the application documentation to be completed and submitted by all applicants are available on the Central Bank’s website. The Central Bank has also published a Guidance Note on the authorisation procedure, which is also available on its website.
It is noteworthy that a finalised version of the application form for authorisation as a Credit Servicing Firm will only be available after the Central Bank completes its consultation exercise. Consequently, those who apply for authorisation prior to this will be required to complete and submit a more detailed application form to the Central Bank following the finalisation of the Authorisation Requirements and Standards for Credit Servicing Firms.
As mentioned, credit agreements originally entered into between an unregulated lender and an SME do not fall within the scope of the 2015 Act.