On 21 January 2019 the Irish Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 (the “Act”) came into force. It amends the Central Bank Act 1997 (the “1997 Act”) and radically alters the operation of the secondary acquisition, ownership and servicing of performing and non-performing Irish consumer loans, and certain SME loans (together, “Relevant Loans”).
The Act amends the existing Irish credit servicing regime introduced in 2015, by extending the scope of regulated activities. These originally comprised mainly loan administration and customer communication.
The Act extends them to include:
(a) The holding of legal title to Relevant Loans (“Legal Title Holding”); and
(b) Managing or administering the Relevant Loans, including by (i) determining the overall strategy for the management and administration of a portfolio of Relevant Loans or (ii) maintaining key control over key decisions relating to such portfolios (“Loan Portfolio Management”, and, together with Legal Title Holding, “Relevant Activities”).
The Act is intended to address a domestic Irish political perception that the 2015 changes did not provide sufficient consumer protection to Irish borrowers. It is noteworthy that in 2018 the Central Bank of Ireland (the "CBI") reported that the prior regime appeared to be functioning satisfactorily and, in particular, that loan enforcement strategies of non-bank lenders were not materially different to those of mainstream banks. While the Act improves on the original February 2017 draft Bill, it poses significant challenges for existing ownership, management and financing arrangements for acquired portfolios, and the completion of future Irish loan sales.
Carrying on Relevant Activities without a credit servicing firm licence is now a criminal offence under Irish law. There are exemptions for certain NAMA entities and other persons which are deemed to be so licenced under the 1997 Act. This latter category includes firms already authorised as credit servicing firms prior to the Act (there are eight such service providers), as well as regulated firms authorised by the CBI, or by another comparable EEA competent authority, to provide credit in Ireland ("Exempted Persons").
For any ongoing and future sales of Relevant Loans, a prospective purchaser will need to ensure compliance with the Act in order to complete the acquisition. There are two basic options. All Relevant Activities will need to be carried on by an Exempted Person (e.g. a bank, a retail credit firm or a retail credit servicing firm) ("Option One"). Alternatively, a credit servicing firm licence will need to be obtained prior to closing (e.g., for the acquisition vehicle and / or its investment manager) ("Option Two").
Each option has its downsides. Option One has been implemented in the Irish market already in anticipation of the Act. However, it requires portfolio bidders to cede control over the management of the portfolio to a bank partner, or to an authorised credit servicer, and this may not work for all asset classes or participants.
Option Two, on the other hand, may not be practical in the context of certainty of deal execution and timing to closing, given each will be dependent on a CBI authorisation decision. The challenges associated with obtaining a CBI authorisation are discussed further below.
Transitional Provisions and Existing Portfolios
For existing portfolios, a three month transition period applies (which ends on 21 April 2019). During this time, any entity carrying out Relevant Activities will need to either restructure its activities to avoid the scope of the Act or apply for a credit servicing firm authorisation.
Where an entity submits a complete authorisation application, it will be granted a transitional licence until the CBI ultimately grants or refuses the application. Any such transitional licence holder will be subject to usual CBI powers of supervision during this interim period.
Most portfolios of Relevant Loans to date have been acquired by ICAVs or section 110 SPVs (whether subsidiary entities or orphans). The acquiring entity will typically appoint an investment or asset manager to conduct delegated portfolio management and an Irish credit servicing firm to conduct consumer-facing loan administration to ensure compliance with Irish consumer protection regimes. Variants exist, such as a SPV that holds the legal title and whose board retains the portfolio-level management. The acquisition vehicle will often be subject to strict covenants under its senior financing.
Notwithstanding the foregoing, authorisation is a significant undertaking and poses real challenges for many existing structures. The credit servicing firm authorisation requirements are detailed and the CBI will apply the same core authorisation principles that it does to all its regimes (e.g. substance and mind and management in Ireland, reputation and integrity of ownership, financial soundness, scrutiny of outsourcing requirements and so on). Further, an entity may not be able to apply for a licence in respect of Legal Title Holding or Loan Portfolio Management only. However, it may be permissible to apply on the basis that all the consumer-facing credit servicing activities would be conducted by existing authorised market participants (i.e. effectively as an outsourcing arrangement with ultimate regulatory responsibility and oversight remaining with the person conducting Legal Title Holding).
Brexit and UK Credit Institutions
The Act contains latent Brexit risk in that UK credit institutions will not continue to qualify under the Act as Exempted Persons in a Brexit scenario where the UK does not remain in the EEA. Without legislative change, any UK bank engaged in Relevant Activities will have to restructure its portfolio arrangements or obtain a credit servicing authorisation to avoid breaching the Act.
The Act contains a safe-harbour for a SPV issuer engaged in certain forms of primary and secondary securitisations of Relevant Loans. The securitisation must be risk retention compliant under the relevant EU rules and an Exempted Person must hold legal title to the portfolio. While it is possible to structure both primary and secondary securitisations to fit these safe-harbour requirements, ultimately this merely clarifies that the SPV issuer in such a structure is not required to be authorised. In most cases, the issuer will not be engaged in any regulated activities anyway.
EU Policy on Regulation of the Non-Performing Loans Market
The Act directly conflicts with the EU's proposed Directive on credit servicers, credit purchasers and the recovery of collateral (the "NPL Directive") which was published in March 2018. The NPL Directive largely adopts the position in Ireland existing prior to the Act, and provides for the regulation of credit servicers but not credit purchasers. While it imposes some secondary reporting obligations on credit purchasers, it also makes it clear that there is no need to regulate loan purchasers (as they do not impose a systemic risk). The NPL Directive specifically provides that loan purchasers may not be subjected to additional requirements: accordingly, Ireland’s gold plating of the regime will breach not only EU policy, but also the provisions of the NPL Directive. If implemented, the NPL Directive would likely apply from 2021 at which point Ireland would be in breach of EU law unless the 1997 Act is amended to repeal this new regulatory regime for loan purchasers.