New legislation to regulate the activity of administering and managing loans to Irish individuals and small to medium-sized enterprises ("SMEs") was passed into law on 8 July 2015. The Consumer Regulation (Regulation of Credit Servicing Firms) Act 2015 (the "Act") had previously been the subject of consultation by the Irish government. Maples and Calder, along with other market participants, actively took part in that process. Many of the initial concerns raised have been addressed.
The Act contains important provisions for purchasers of Irish loans acquired from, or originated by, regulated lenders. In brief, it sets out a regime for the authorisation of any person whose activities include the management or administration of such loans to Irish individuals or SMEs. In broad terms, the Act distinguishes between the owner of the credit and the servicer of the credit. An owner need not be authorised where it has appointed a credit servicing firm authorised under the Act (a "servicing firm") and engages in high-level strategic decision making only in relation to the portfolio.
Purpose of the Act
The overall purpose of the Act is to ensure that Irish individuals and SMEs continue to enjoy statutory protections where their loans have been transferred to an unregulated purchaser. Previously, where such a loan was transferred to an unregulated purchaser the borrower would lose such statutory protections. Whilst some purchasers agreed voluntarily to observe these regulatory standards, this was not considered by the Irish government to be satisfactory from a policy perspective.
Scheme of the Act
Rather than create an entirely new regulatory regime, the government decided to build on the framework in place for retail credit lenders and debt management firms. The entire Act, therefore, comprises amendments to particular provisions of Irish financial services legislation and has no stand-alone operative provisions.
The Act requires any person who administers or manages a loan portfolio, other than an owner of relevant loans which is itself authorised to provide credit in Ireland, to become authorised as a servicing firm by the Central Bank of Ireland ("CBI"). Managing and administrating loans is defined to include typical loan servicing activities (e.g. borrower communication, complaint-handling, collecting payments, ongoing borrower credit-assessment, arranging alternative repayment arrangements and enforcement). However, regulated activities are not defined exhaustively. Therefore a careful analysis of the services provided across any given portfolio needs to be conducted.
An unregulated owner need not become authorised where it has appointed a servicing firm and engages in high-level strategic decision making only in relation to the portfolio (see further below). It should be noted that there is no minimum authorisation threshold (whether by way of value or number of loans), nor does the CBI have any discretion to grant exemptions (e.g. where the individual or SME borrower element is a small part of the portfolio).
A person who applies to become a servicing firm will have to obtain CBI's approval of its management and owners as suitable persons to be involved in the provision of regulated financial services. It is also expected that key management and business functions will be subject to the CBI's Minimum Competency Code. Whilst applicants may currently apply for authorisation as a servicing firm, CBI is currently consulting with the industry on appropriate authorisation requirements and standards. There are no minimal capital requirements but CBI will assess the financial strength of applicants. As part of the consultation process CBI is canvassing views on issues such as professional indemnity insurance, outsourcing and ensuring that the servicing firm's relationship with the portfolio owner does not impede regulatory compliance.
As this is not EU-driven legislation, a CBI authorisation to act as a servicing firm cannot be "passported" to other EU/EEA Member States.
Where an unregulated loan owner takes only high-level strategic decisions in relation to its portfolio of loans it will not need to become authorised as a servicing firm, provided that the day-to-day administration of the loan portfolio is carried out by a servicing firm. To enjoy this safe harbour the portfolio owner must confine itself to the following types of activity:
- Determining the overall strategy for the portfolio;
- Maintaining control over key decisions relating to the portfolio; and
- Taking decisions that are necessary to enforce the terms of a credit agreement.
A further provision is that the unregulated loan owner does not require authorisation to do any of these things, provided that it does not take such actions in a manner which if taken by a regulated entity would constitute a breach of Irish financial services law. Therefore the Act is far-reaching because it effectively imposes regulatory standards on unregulated entities.
Further, where the loan owner delegates such strategic or portfolio level decision-making to an investment manager (as is typical), that manager will enjoy the benefit of the same safe harbour, but will be subject to the same proviso. In this regard, relevant investment managers (or other actors, such as private equity firms) need to be careful of how they operate their investments in Irish loan portfolios.
SME loans originally provided by an unregulated lender are outside the scope of the Act. This is in keeping with the primary policy aim of the Act to ensure the continuation of statutory protections to relevant Irish borrowers. This is a welcome clarification, as it does not disrupt the current operating practices of alternative credit originators in the Irish market.
The key protections which will continue to apply in favour of Irish individuals and SMEs are as follows:
- A right to sue by way of a private right of action for damages for breach of financial services legislation;
- A right to refer disputes to the Financial Services Ombudsman; and
- The enjoyment of rights under CBI Codes of Conduct, such as the Code of Conduct on Mortgage Arrears, the Consumer Protection Code and the Code of Conduct for Business Lending to SMEs (or successor CBI regulations enacted pursuant to the Central Bank Supervision and Enforcement Act) 2013).
Transitional provisions and the immediate situation post 8 July 2015
Any person who carries on regulated management and administration of relevant loans will have to apply for authorisation within three months of 8 July 2015. If it does so, it is deemed to be authorised until its application has been determined finally by the CBI. Loan owners (or their investment managers) should contact their portfolio servicers immediately to ensure they are taking such action prior to the end of this relatively short transition period.
The Act applies with immediate effect. Accordingly any loan portfolio owner which does not have a servicer that is, or has applied to become, authorised as a servicing firm runs the risk of committing a criminal offence and/or triggering civil liability for engaging in credit servicing activities without regulatory cover.
The Act applies to loan sales completed prior to its enactment, as well as pending and future transactions (as well as secondary trades or other potential forms of exit transactions). Any entity which has purchased a loan portfolio which contains relevant loans to individuals or SMEs will have to review the portfolio service structure to ensure compliance with the Act.
Most loan portfolio purchasers have to date been unregulated entities, such as "section 110" companies. Where a loan portfolio comprises relevant loans to individuals or SMEs, the unregulated purchaser will have to either become a servicing firm or appoint a servicing firm to administer and manage the portfolio. Thereafter, the purchaser must ensure that its involvement (or that of its other servicers) in the administration and management of the portfolio is confined to high-level or strategic issues.
Loan portfolio purchasers who have already appointed a person to manage and administer the portfolio will have to ensure that the servicing agreement requires the service provider to be or become a servicing firm and comply with the Act and the other regulatory obligations which flow from the Act. Servicing agreements will also have to cater for the apportionment of liability where the credit servicer fails to comply with its regulatory obligations. It seems clear that CBI will review servicing agreements as part of the authorisation process.
The Act also makes it an offence for a servicing firm to take or fail to action on its own behalf, or on behalf of its client loan owner, if the taking of or the failure to take the action would otherwise be a contravention of Irish financial services legislation if an authorised retail credit firm took or failed to take that action. As such, it is expected that the loan portfolio servicers established in the market will review their agreements to ensure their liability in this regard is managed.
Further, any investment management or advisory agreements will need to be reviewed to ensure the manager is not authorised to take any actions which would require it to be authorised as a servicing firm under Irish law.
The Irish VAT implications for the provision of services should also be carefully addressed, particularly in the context of any refined division of labour between the two categories of servicer and any continued reliance on relevant VAT exemptions.