Overview of the Original Bill
On Wednesday, 27 May 2015, the Select Sub-Committee on Finance voted in favour of a number of amendments to the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (“Amended Bill”), which was published on 15 January last. As a result of one of these amendments, the Amended Bill no longer covers credit agreements originally entered into between small and medium enterprises (“SMEs”) and unregulated lenders.
As set out in our briefing note of 16 January 2015, the primary purpose of the Consumer Protection (Regulation of Credit Servicing Firms) Bill 2015 (“Original Bill”) is to address concerns regarding the loss of regulatory protections for borrowers when credit agreements entered into with regulated entities are subsequently sold to unregulated entities.
Consumers and SMEs who borrow from regulated entities enjoy a number of regulatory protections including those provided under the Central Bank of Ireland’s (“Central Bank”) 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. However, some or all of these protections may be lost if the relevant loan book is sold by a regulated entity to an unregulated one. Moreover, customers of unregulated entities do not have access to the FSO.
The Original Bill ensures that borrowers retain all of their regulatory protections in the event of a loan sale from a regulated entity to an unregulated one, by regulating “credit servicing firms”. These are firms which manage or administer the credit agreement with the consumer or SME on behalf of the unregulated purchaser on an outsourced basis. An entity that does not outsource the activity of credit servicing will itself have to be regulated to conduct that activity. In addition, the Original Bill provides that eligible borrowers whose credit agreements are being serviced will have a right of access to the FSO.
The Original Bill does not contain any exemptions for loans to SPVs, syndicated lending or intragroup lending.
As mentioned, the central purpose of the legislation is to ensure that a person who borrows from a regulated entity does not lose regulatory protections following the sale of a loan book to an unregulated entity. In other words, the legislation seeks to preserve the status quo which existed at the time the credit agreement was entered into.
However, the Original Bill took a more extensive approach, which gave rise to concerns in terms of its possible impact on SME lending. Specifically, the Original Bill applied to all credit agreements with SMEs irrespective of whether or not the original lender was a regulated financial service provider. In essence this would mean that credit agreements between SMEs and unregulated lenders would need to be serviced by a regulated entity and would be subject to regulatory protections.
Had the Original Bill been enacted, it would have significantly affected the legal landscape for much corporate lending in Ireland. Amongst other things, it was widely feared that the Original Bill could deter unregulated lenders from providing loans to SMEs by making it more difficult for these lenders to service and sell those loans. In addition, it would no longer have been possible for an unregulated lender to advance credit to SMEs without appointing a third party regulated servicer.
The Amended Bill
Following the 27 May meeting of the Select Sub-Committee on Finance, the Original Bill has been amended in several respects. While some of these amendments are textual in nature, others are more significant. In particular, as mentioned, the Amended Bill excludes from its scope loans originally entered into between SMEs and unregulated lenders. The Amended Bill is only concerned with credit agreements entered into between an SME and a financial service provider authorised to provide credit in the State.
In addition, the Amended Bill defines the term “credit servicing firm” so as to include all regulated financial service providers authorised by the Bank or by a comparable authority in an EEA country to provide credit in the State. This means that, to the extent that a credit servicing firm is subject to specific requirements, these will also apply to all such financial service providers (eg, banks and retail credit firms).
Finally, the Amended Bill contains a new Section 34G to be inserted into the Central Bank Act 1997. According to that section, a credit servicing firm must not take or fail to take an action that would be a prescribed contravention if a retail credit firm took or failed to take that action. In addition, it is an offence for a person who holds the legal title to credit granted under a credit agreement to instruct a credit servicing firm to take or fail to take an action, if it would be a prescribed contravention for a retail credit firm to take or fail to take that action. A prescribed contravention includes a contravention of the Codes.
Comment and Next Steps
The exclusion of loans entered into between SMEs and unregulated lenders from the scope of the Amended Bill appears to be fully in accordance with our understanding of the purpose of the legislation, namely to address concerns regarding the loss of regulatory protections for borrowers when loans originally entered into between the borrower and a regulated entity are subsequently acquired by an unregulated entity. Nevertheless, some concerns remain as to the Amended Bill’s scope. For example, unlike the SME Code, the Amended Bill does not carve-out from its scope lending to financial institutions, syndicated, club or multi-lender transactions or lending to SPVs.
The Amended Bill will now continue its passage through the Houses of the Oireactas. Once the legislation comes into operation, a grand-fathering regime will apply to existing credit servicers subject to making an application to the Central Bank for authorisation no later than three months thereafter.