February saw the publication of new draft legislation, the Consumer Protection (Regulation of Credit Servicing Firms) (Amendment) Bill 2018 (the Bill), which could significantly affect the operations of investors in Irish banking assets by subjecting them to more stringent rules aimed at protecting consumers and small businesses.
New licencing requirements
Fianna Fáil, an opposition party which supports the Irish Government on the basis of a confidence-and-supply deal, published the Bill on 20 February. This followed public debate about the protection of borrowers when dealing with entities who have acquired loans and security during the recovery of the Irish banking sector, often funded by foreign capital.
Until now, purchasers of Irish bank assets have generally not been subject to licencing by the Central Bank of Ireland (CBI), although they are required to appoint a regulated credit servicer, which in turn is subject to rules protecting borrowers.
“Credit Agreement Owner”: newly regulated
This regime will change if the Bill becomes law. In particular, the Bill would require licencing for each “credit agreement owner”, being an entity which:
- Holds legal title to a portfolio of loans
- Determines overall strategy or controls key decisions relating to a portfolio
- Decides interest rates for a portfolio, or
- Undertakes credit services or enforcement steps
Potentially severe restrictions
The provisions of the Bill would apply not just to future acquisitions of bank assets, but to those who have already made investments of this type.
The Bill would require credit agreement owners to inform borrowers as to the terms on which a loan was acquired, and impose restrictions on enforcement steps (eg in respect of a non-material default by the borrower).
However, the particular terms of the licence itself will be decided by the CBI if the Bill becomes law.
Concerns and question marks
As drafted, the Bill raises a number of questions and potential difficulties. These include:
- Will it be possible to regulate those who have already purchased bank assets? The Irish Constitution has tended to protect property rights robustly. Absent a grandfather clause, owners of Irish loan portfolios may find the value of their investment hampered by the new regulation.
- How will the CBI regulate foreign parties? It is hard to see how CBI can impose penalties on non-Irish entities, so an unintended consequence may be that only Irish-based purchasers could invest in these assets. This in turn raises difficulties under EU competition law, for example if Irish and non-Irish investors were subject to different rule sets.
- What if a prospective “Credit Agreement Owner” is refused a licence? The Bill does not appear to address the consequences of this.
The Bill provides for redress for borrowers, among other things, where enforcement steps are taken where a customer “is not in financial difficulties”. The breadth of this provision may have unintended consequences, and may be open to abuse.
It is far from certain that this Bill will become law in its current form, given the balance of power in the Irish parliament. But there is a reasonable likelihood that legislation of some type will be passed to regulate this area, perhaps modified following input from the CBI and the Competition and Consumer Protection Commission.
Parties who have invested in Irish bank assets, or intend to in the future, should track developments carefully, given the potentially profound effects for their operations.