On 22 December 2015 the Central Bank of Ireland (“CBI”) published full details of the regulatory authorisation process for credit servicing firms, including the final Stage 2 application form.
Since 8 July 2015 credit servicing has been a regulated activity in Ireland. This change in the law was driven by concerns that the increased sale of loan portfolios by credit institutions to unregulated entities since the financial crisis was resulting in consumer and SME borrowers losing certain protections provided by the various statutory codes and standards that apply only to regulated entities.
The Consumer Protection (Regulation of Credit Servicing) Act 2015 (the “Act”) introduced a new regulatory regime for a new type of regulated entity called a ‘credit servicing firm’.
Firms which were conducting credit servicing before the introduction of the Act on 8 July 2015 were deemed to be authorised to continue doing so if they submitted a completed Stage 1 application form to the CBI before 8 October 2015. These firms will still have to submit a Stage 2 application form (see topic 7 below) but in the interim they remain authorised to continue providing such services.
In contrast, new entrants cannot begin conducting credit servicing until they have successfully completed the full authorisation process (see topic 5 below).
2. What credit agreements fall within the scope of the new regime?
Protection is given to borrowers who are classified as ‘relevant borrowers’ under a ‘credit agreement’ where a ‘credit servicing firm’ undertakes ‘credit servicing’ activities. For this purpose, a ‘credit agreement’ means an agreement whereby a creditor grants, or promises to grant, credit to a ‘relevant borrower’. A ‘relevant borrower’ means:
- A natural person within Ireland (unless that natural person is a regulated financial service provider or it is, or it satisfies the criteria to elect to be treated as, a professional client for the purpose of the MiFID Regulations); or
- A micro, small or medium-sized enterprise* but only to the extent that the credit granted to it under the credit agreement concerned was provided by a financial service provider authorised, by the CBI or an authority that performs functions in an EEA country that are comparable to those performed by the CBI, to provide credit in Ireland.
3. What is ‘credit servicing’?
The Act defines ‘credit servicing’ in relation to a credit agreement as managing or administering the credit agreement, 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;
- Managing or administering any of the following:
- repayments under the credit agreement
- charges imposed on the relevant borrower under the credit agreement
- errors made in relation to the credit agreement
- complaints made by the relevant borrower
- information or records relating to the relevant borrower in respect of the credit agreement
- the process by which a relevant borrower’s financial difficulties are addressed
- any alternative arrangements for repayment or other restructuring
- the assessment of the relevant borrower’s financial circumstances and ability to repay under the credit agreement; or
- Communicating with the relevant borrower in respect of any of the above matters.
The Act also lists certain activities that are generally excluded from the definition of ‘credit servicing’. These are:
- Determination of the overall strategy for the management and administration of a portfolio of credit agreements;
- The maintenance of control over key decisions relating to such portfolio; or
- Taking such steps as may be necessary for the purposes of enabling the undertaking of credit servicing by another person/firm or enforcing a credit agreement.
These exclusions effectively limit the core definition of ‘credit servicing’ to day-to-day loan servicing activities. They are designed to avoid a situation where the activities of an unregulated entity which acquires a consumer loan portfolio, and which appoints a credit servicing firm to undertake the day-to-day servicing of that loan portfolio, would also fall within the definition of ‘credit servicing’ by virtue of its role in appointing and setting the strategy of the credit servicing firm, overseeing its activities and being party to any enforcement action.
4. What is a 'credit servicing firm'?
The Act defines a 'credit servicing firm' as:
- A person/firm (other than the Irish State owned “bad bank” NAMA or a NAMA group entity) which:
- Undertakes credit servicing other than on behalf of a regulated financial service provider authorised by the CBI, or an authority that performs functions in an EEA country that are comparable to those performed by the CBI, to provide credit in Ireland; or
- Holds the legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorised to carry on the business of a credit servicing firm; and
- A regulated financial services provider that is deemed to be authorised to carry on the business of a credit servicing firm because it is authorised, whether before or after the coming into operation of the Act, by the CBI, or an authority that performs functions in an EEA country that are comparable to those performed by the CBI, to provide credit in Ireland.
5. What is the authorisation process?
The CBI published all outstanding information on the new authorisation process on 22 December 2015. A firm seeking to conduct credit servicing for the first time must complete the following four documents and submit them to the CBI simultaneously:
- Completed Stage 1 application form
- Completed Stage 2 application form
- Programme of Operations
- Business Plan
In December 2015 the CBI also published Authorisation Requirements and Standards for Credit Servicing Firms against which each application will be assessed. These can be summarised as follows:
General Authorisation Requirements
- The organisation of the business structure must be capable of supervision by the CBI and adequate and effective control of the firm must reside within the State
- Adequate levels of professional indemnity insurance cover must be in place
- Robust governance, staffing, IT systems and compliance arrangements must be established
- A commitment to supply regular audited accounts and to comply with ongoing reporting obligations to the CBI must be provided
- No important operational function may be outsourced in such a way as to impair the quality of the firm’s internal controls or the CBI’s ability to monitor the firm’s compliance with its regulatory obligations
- Appropriate record keeping systems must be implemented
In addition, a firm must be conscious of the ongoing obligations it will be subject to under statutory codes of conduct once it is authorised, including:
- Consumer Protection Code 2012
- Code of Conduct on Mortgage Arrears 2013
- Code of Conduct for Business Lending to Small and Medium Enterprises 2012
- Annual Levy calculated under the Central Bank Act 1942
- Compliance with the Fitness and Probity Regulations and Standards issued by the CBI
- Minimum Competency Code 2011
6. Stage 1 Application Form
This is a preliminary application form covering the following topics:
- Structural organisation of the firm
- Proposed activities of the firm which fall within the scope of the Act
- Breakdown of the types of loans to be serviced (to include the value of loans, arrears statistics and customer profiles)
- Financial information (to include the most recent audited financial statements and up-to-date management accounts)
- Details of professional advisors and external auditors
- Details of directors, managers and staffing arrangements (to include staff that may need to meet the CBI’s Fitness and Probity Standards or carry out certain controlled functions)
- Details of Qualifying Shareholders in the firm
- Regulatory background.
7. Stage 2 Application Form
This is a more detailed supplemental application form and contains questions relating to the programme of operations and business plan that must accompany the Stage 2 application form (see topics 8 and 9 below) including:
- Details of proposed credit servicing activities
- Details of who the credit servicing is being conducted on behalf of
- Details of any agreements with loan owners
- Other credit servicing related activities and non-credit servicing related activities
- Outsourcing and oversight of same
- Risk management and compliance
- Details of professional indemnity insurance cover
- Likely income to be generated from credit servicing activities
- Business strategy.
8. Programme of Operations
The programme of operations is ancillary to the Stage 2 application form. It must follow a mandatory structure covering the following matters in detail:
- Overview of the proposed credit servicing activities that the firm plans to provide within 18 months of authorisation and whether these activities will be carried out on its own behalf or for others
- Outline of the relationship between the firm and the loan owner(s)
- Organisational structure of the firm
- Governance and staffing arrangements
- Information on directors and senior management
- Outsourcing and oversight of same
- IT policies and practices
- Compliance with the CBI’s statutory codes
- Compliance and risk management policies
- Internal audit policies
- Administration and accountancy
- Business continuity and disaster recovery policies.
9. Business Plan
The business plan is also ancillary to the Stage 2 application form and must follow a mandatory structure covering the following topics:
- Background and introduction to the firm’s business
- Financial information
- Financial projections
- Business model and strategy and value proposition.