Credit servicing firms and lenders take note, the Central Bank of Ireland (the “Central Bank”) has published its Authorisation Requirements and Standards for Credit Servicing Firms (“Requirements and Standards”). This document sets out the authorisation requirements applicable to credit servicing firms both at the time of authorisation and on an on-going basis, as well as certain other applicable regulatory requirements. The Central Bank has also published frequently asked questions on credit servicing (“FAQs”).
As set out in our previous briefing, (available here), the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “2015 Act”) seeks 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 achieve this goal, the 2015 Act introduces a new regulatory regime for credit servicing firms which essentially subjects them to the provisions of Irish financial services law that apply to “regulated financial service providers” (“RFSPs”), including in particular, the various statutory codes issued by the Central Bank (“Codes”). Under the 2015 Act, any agreement entered into between a RFSP and a relevant borrower must be serviced by a credit servicing firm, including where the agreement is subsequently sold to an unregulated third party.
The 2015 Act entered into force on 8 July 2015. Shortly afterwards, on 14 July 2015, the Central Bank published Consultation Paper CP96 on the Authorisation Requirements and Standards for Credit Servicing Firms and Consequential Amendments to Statutory Codes (“CP96”). This consultation closed on 30 September 2015 and, on 10 December 2015, the Central Bank published its Requirements and Standards, as well as its Feedback to CP96.
Overview of Requirements and Standards
The Requirements and Standards sets out the authorisation requirements imposed on a credit servicing firm both as a condition of authorisation and for the on-going conduct of its business. These requirements can broadly be categorised as follows; general requirements, professional indemnity insurance, organisation and management, IT systems, relationship with the Central Bank, audited accounts and ongoing reporting, ownership, outsourcing, relationship with loan owners, other places of business and record keeping.
General Requirements – in common with other RFSPs, a credit servicing firm must be able to demonstrate that its business is structured in 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. In addition to the factors which the Central Bank typically takes into consideration in this regard, such as where the firm’s mind and management is located, the Central Bank will also consider how the credit servicing firm intends to engage with borrowers, including, in particular, the practical resolution facilities that will be made available to borrowers in arrears.
Professional Indemnity Insurance – a credit servicing firm must have professional indemnity insurance that provides a minimum cover 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. This requirement does not apply to credit servicing conducted on behalf of a RFSP that is authorised to provide credit in the State (such as banks) because in such cases the RFSP will be responsible for ensuring that the borrower benefits from the various regulatory protections.
Organisation and Management – a credit servicing firm must be able to conduct its affairs in a manner that ensures that its customers’ best interests are protected. This includes having robust governance arrangements and adequate staff in place, as well as a compliance function and an internal audit function. The credit servicing firm must have sufficient resources to be able to conduct its business in accordance with regulatory requirements, however, the Requirements and Standards do not impose a capital requirement on credit servicing firms.
IT Systems – a credit servicing firm must have in place adequate IT systems capable of meeting any relevant obligations under any applicable Code. It must also have procedures in place to mitigate risks associated with its IT systems, including effective business continuity and disaster recovery procedures.
Relationship with Central Bank – the Requirements and Standards contain a number of provisions aimed at ensuring that the relationship between a credit servicing firm and the Central Bank is a constructive one. Credit servicing firms should note in particular that the Central Bank has included a notification requirement pursuant to which each credit servicing firm must notify the Central Bank before taking on a new loan portfolio or client which results in it conducting credit servicing activities. This notification requirement does not apply where the credit servicing is being conducted by a RFSP authorised to provide credit in the State.
Audited Accounts and On-going Reporting – a credit servicing firm must make available audited accounts and any applicable auditor’s report to the Central Bank upon request. It must also comply with any Central Bank reporting requirements.
Ownership – a credit servicing firm must give the Central Bank advance notice where there is a proposed material change in its ownership. In cases where the firm is unable to give such notice (eg, where a change of ownership relates to a parent of a regulated entity which is a plc and whose shares are publicly traded on a listed stock exchange), it should give notice as soon as it becomes aware of the change.
Outsourcing – a credit servicing firm must not outsource activities to an extent that would impact on its ability to meet all regulatory requirements. Significantly, each firm must notify the Central Bank:
- in advance, where it proposes to outsource any important operational function relating to the provision of credit servicing; and
- as soon as possible where a material change occurs or is due to occur in an outsourcing arrangement governing an important operational function relating to the provision of credit servicing.
In addition, a credit servicing firm must give advance written notice to a customer regarding any third party contacting the customer on the firm’s behalf.
Relationship with Loan Owners - a credit servicing firm must give written information of its obligations under financial services legislation to the holder of legal title over loans for whom it acts.
Other Places of Business – before operating from a place of business other than its head office, a credit servicing firm must seek the Central Bank’s prior approval, and notify it at least 14 days in advance of the nature of the services to be provided from the other place of business and the names of those responsible for managing it.
Record Keeping – each credit servicing firm must keep appropriate records regarding its credit servicing business and notify the Central Bank in writing of the address where those records are kept.
The FAQs – Notice Requirements
The FAQs set out the responses to a number of questions dealing with the background to the 2015 Act and its scope. Significantly, the FAQs deal with the application of provision 3.11 of the Central Bank’s Consumer Protection Code 2012 (“CPC”), which requires a regulated lender to provide advance notification to both the Central Bank and affected consumers where it intends to transfer all or part of its “regulated activities”. According to the FAQs, this provision means that the original lender must provide a consumer with at least 2 months’ notice before transferring all or part of its loan book covered by the CPC to another person including where the transferee is an unregulated entity . Where the transferee is an unregulated entity, the regulated lender must also notify the consumer of the regulated entity that will be ‘servicing’ the loan for the unregulated entity.
In the event that there is a change in the credit servicing firm, the existing credit servicing firm must also notify the Central Bank and the consumer at least two months in advance.
Comment and Next Steps
As set out in our briefing of 29 July 2015, the 2015 Act has a number of far-reaching implications for all those carrying on credit servicing activities with respect to cash loans to individuals and small and medium enterprises, including primary and master servicers. While the Requirements and Standards are largely in line with those imposed on other RFSPs, the legal owners of loans and credit servicing firms should take particular note of the various notification requirements imposed under the Requirements and Standards and under the CPC.
One additional matter addressed in the responses to CP96 is the extent to which the CPC applies to financial institutions, multi-lender transactions and special purpose vehicles. While these types of entities are explicitly excluded from the Code of Conduct for Business Lending to Small and Medium Enterprises, there is no equivalent exclusion from the CPC. This means that, depending on the type of entity involved, it may fall within the specific obligations imposed by the CPC regarding the provision of financial services to consumers with resulting implications for the lender and credit servicer. While the Central Bank does not address this matter in the Requirements and Standards, it has indicated that it will consider amending Chapter 1 of the CPC to exclude such entities from its scope in the context of a wider review of the CPC.
Applicants seeking authorisation under the 2015 Act must submit a completed Application Form for Authorisation as a Credit Servicing Firm (Stage 1) and a completed Individual Questionnaire in respect of each person proposed to hold a Pre-Approval Controlled Function. In addition, the Central Bank will shortly publish a Stage 2 supplemental Application Form and Guidance Note to take account of the Requirements and Standards. Applicant firms will also be required to complete a Stage 2 Application.