Last week, the Department of Finance issued a consultation paper on proposed legislation which will require the purchaser of certain Irish retail credit loans to become authorised and regulated by the Central Bank of Ireland ("CBI"). The key points to note are as follows:
- The proposal is at consultation stage only at present;
- The proposed legislation will apply only to "retail" loans not loans to Irish corporates; and
- The proposed legislation will apply to both Irish and non-Irish purchasers.
This has been flagged previously by the government, particularly in the residential mortgage sector. It follows local political concerns expressed over recent months regarding transactions where banks regulated by the CBI have sold loan books to purchasers that are not regulated by the CBI.
The concern expressed is that a non CBI-regulated purchaser is not obliged to comply with a number of CBI Codes of Practice (the "CBI Codes") which provide protections for specified classes of Irish borrowers (i.e., primary residence home loans, consumer loans and SME loans) that would have applied had the loans not been transferred.
A number of purchasers have confirmed that they will voluntarily comply with the applicable CBI Codes upon acquiring the loans. However, the government remains concerned that there is no statutory basis for the CBI to ensure such voluntary compliance occurs.
The net effect of the proposed legislation will be to require all existing and new purchasers of relevant loans to become authorised under the existing "retail credit" regime as an owner of retail credit. Currently, only providers (i.e. originators) of retail credit must be authorised by the CBI. If the new legislation is passed, a retail credit owner will also need to be authorised by the CBI.
Generally, retail credit is any loan to an individual in Ireland, except where the individual is a person who is, or satisfies the criteria to be treated as, a "professional client" under the Irish regulations implementing the Markets in Financial Instruments Directive, or is a regulated financial services provider. Other criteria, for example, the purpose of the borrowing, or whether it is secured or unsecured, are irrelevant. Furthermore, the retail credit regime affects providers of credit no matter where they are based.
It is noteworthy that the ownership of loans to Irish corporates is therefore outside the scope of the proposal currently. It should also be noted that there are a number of exemptions available (either by operation of the legislation or by application to the CBI), including for 'plain vanilla' securitisations.
If the legislation is implemented, there will be an interim period whereby existing retail credit owners will be deemed to be authorised, provided that they apply for an authorisation within 3 months of the new law coming into force.
Effectively, this means that the relevant CBI Codes will apply to the acquired loans, and existing retail credit owners will be subject to CBI oversight, on the date the legislation is brought into force.
While the rationale for the proposed legislation has been clearly articulated, the initial proposal is unsatisfactory in a number of respects:
- Unless a proportionate and practical policy approach to the authorisation and regulation of retail credit owners is adopted by the CBI, requiring a retail credit owner to be licenced on the same basis as a retail credit lender will result in a disproportionate response to the government's stated objective.
Often, SPVs or investment funds are the vehicles used to acquire the loans, and such entities are not typically equipped to meet the requirements of a retail credit licence.
For example, obtaining and maintaining a retail credit licence in the normal course requires various prescribed functions such as anti-money laundering and credit to be housed in the licenced entity. Similarly, officers of the retail credit owner will now be subject to fitness and probity requirements and the licenced entity will be subject to various ongoing compliance burdens.
Many (if not all) loan purchasers do not originate new credit. The intention is simply to acquire a book of loan receivables at an attractive price point and run the book to maturity. Aside from loan administration (which the consultation paper recognises does not require authorisation), the retail credit owner has no interaction with borrowers on a day-to-day basis. Where defaults occur, enforcement may of course be necessary to realise value. However, subjecting the retail owner to the full range of regulatory duties is disproportionate and will discourage activity in the loan acquisition market. If the intention is merely to ensure that the loan purchaser becomes subject to the applicable CBI Codes on a statutory basis a much lighter regime could easily be designed.
- It is stated that the CBI will require the retail credit owner to "have a presence" in Ireland. It is not clear what this will mean in practice for the retail credit owner, particularly where non-Irish entities have been used to acquire relevant loans. It is hoped that the use of a portfolio servicer located in Ireland, as is common in these transactions, will help to satisfy this requirement.
The consultation period ends on 22 August 2014.