The current draft of the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (available here) proposes one of the most significant expansions to financial services authorisation requirements in recent years. Authorisation from the Central Bank of Ireland will be required in relation to a broader scope of “credit” (no longer only “cash loans”) whether provided directly or indirectly, as well as to hire-purchase and consumer-hire business, in each case involving natural persons.
A new cap of 23% APR is also to be imposed on consumer credit agreements and consumer hire-purchase agreements.
This briefing outlines the principal aspects of the changes proposed by the Bill and what potentially affected businesses should consider doing now.
What is Proposed?
According to its explanatory memorandum, the Bill has the following principal objectives:
- “to provide for the extension of authorisation requirements to persons carrying on hire-purchase or consumer-hire business or providing credit indirectly and persons carrying on business relating to hire-purchase or consumer-hire agreements or the indirect provision of credit…
- to provide for a limit on the interest rate that consumers may be charged under credit agreements and hire purchase agreements; to provide for a requirement to include the annual percentage rate in a hire-purchase agreement…”.
These objectives are to be achieved through a series of amendments to existing legislation, especially the Central Bank Act 1997 (“CBA 1997”) and the Consumer Credit Act 1995 (“CCA 1995”). The amendments are quite technical in nature and, based on the current drafting, the Bill may have implications beyond those outlined above. The following provides a high level summary of the key issues but potentially affected persons will need to take detailed legal advice on how these legislative developments will impact on their business.
What are the new Authorisation Requirements?
The first important point to note is that the expanded authorisation requirements generally only apply to transactions involving natural persons (though note this is not limited to “consumers”). The authorisation requirements apply in relation to a “regulated business”, which includes “…the business of a retail credit firm…or the business of a credit servicing firm”.
Retail Credit Firm
The business of a retail credit firm has been expanded (beyond the provision of cash loans) to include the following “Relevant Activities”:
- directly or indirectly providing “credit”; or
- entering into consumer-hire or hire-purchase agreements with,
a “relevant person” (being a natural person, subject to some limited exceptions).
While the precise meaning of “indirectly” providing credit is not set out in the Bill, the accompanying press release clarifies that this is intended to capture circumstances where the “…lender provides credit to the borrower by paying a retailer for the purchase of a good”.
The concept of “credit” has been expanded so that instead of applying only to “cash loans” it now includes:
- a deferred payment;
- cash loans; and
- other similar financial accommodation. (The term “financial accommodation” is defined by reference to the CCA 1995 ie the term “includes credit and the letting of goods”).
The definitions of the newly in-scope consumer-hire agreements and hire-purchase agreements are similar to those used in the CCA 1995, with the important distinction that they apply to a broader range of natural persons and are not limited to “consumers”.
Importantly, existing exclusions to both the definitions of “retail credit firm” (eg a person already authorised to carry on a relevant activity; a person acquiring credit originated by another person1) and “credit” (eg credit originated and held by credit unions; certain credit provided without interest or charge) are retained with some drafting amendments. Some new exclusions to these definitions are also added: eg “credit” does not include the “bailment of goods to a hirer under an agreement of less than 3 months’ duration under which the property in the goods remains with the owner” and “retail credit firm” does not include “a person whose business consists partly of a relevant activity, but only by virtue of the person providing credit in the form of trade credit”.2
The upshot of the above is that any entity, whether currently authorised or not, which may be involved in Relevant Activities will need to carefully consider whether it (i) must apply to the Central Bank of Ireland (“CBI”) for an authorisation; or (ii) could instead re-structure its activities so that a duly authorised entity (such as a credit servicing firm) carries on the Relevant Activities on its behalf. Each of these options will require significant time and detailed legal advice so in-scope entities should engage with this issue as early as possible, especially if they wish to make best use of the transitional provisions discussed below.
Credit Servicing Firms
The second significant change to authorisation requirements is the expansion of the scope of the business of “credit servicing”. Broadly summarised, the business of “credit servicing” involves any of the following in relation to an in-scope agreement:
- holding the legal title to the agreement;
- managing or administering the agreement (eg collecting payments, handling complaints);
- determining the overall strategy for the management and administration of a portfolio of agreements;
- maintaining control over key decisions relating to such portfolio; or
- communicating with the customer in relation to the above (other than holding legal title).
The range of in-scope agreements is to be expanded by:
- capturing a broader range of credit agreements, due to the broader definition of “credit” (discussed above); and
- the extension of credit servicing to hire-purchase agreements and consumer-hire agreements with natural persons.
In light of the above, entities which engage in “credit servicing” (whether currently on a regulated or an unregulated basis) will need to undertake a detailed analysis of their business in light of the proposed amendments and decide whether to apply to the CBI for authorisation (or the expansion of conditions attached to an existing authorisation).
Broadly summarised, the Bill contemplates a number of different ways in which an entity engaged in Relevant Activities prior to enactment of the Bill’s provisions will be deemed to be authorised (or excluded from the need for further authorisation) in relation to the expanded scope of “regulated business”. These include some specific provisions, which allow an entity to apply for a transitional authorisation in relation to a Relevant Activity.
The transitional authorisation provisions require the entity to apply to the CBI no later than 3 months after the coming into operation of the relevant provisions of the Bill.3 The question of whether such an application is needed or possible will depend on a number of factors, including the existing authorisations held by that entity (if any), the nature of Relevant Activities already being carried on, and those that are intended to be carried on in the future.
23% APR Limit and New Documentary Requirements for Consumers
The CCA 1995 is also being amended in relation to credit agreements and hire-purchase agreements with consumers (ie natural persons acting outside the course of their business).
The key changes are:
- Maximum APR: a new cap of 23% “APR”4 is imposed on credit agreements (other than moneylending agreements) and hire-purchase agreements with consumers. If this cap is breached, the creditor/owner is not entitled to enforce the agreement or any guarantee or security (though the court retains an equitable discretion to allow enforcement in certain circumstances).
- Hire-Purchase Information Statement: the existing prescribed information statement requirements for hire-purchase agreements are updated to require inclusion of the applicable APR. (This requirement already existed for credit agreements).
A number of other technical changes are being made to the CCA 1995, some of which may have consequences that are not immediately apparent at first glance. For example, the definition of “credit institution” in the CCA 1995 is being amended so that it includes a “retail credit firm” within the updated meaning of the CBA 1997. This may have the effect of bringing a retail credit firm within the scope of section 149 of the CCA 1995, which requires the notification of certain charges to the CBI.
In addition to the above, some consequential amendments are to be made to the Financial Services and Pensions Ombudsman Act 2017 and the Central Bank (Supervision and Enforcement) Act 2013 so that hire-purchase agreements, consumer-hire agreements and the broader range of “credit” agreements set out in the CBA 1997, are brought within the scope of this legislation, including its disputes/complaints resolution mechanisms and oversight/enforcement mechanisms.
As should be clear from the above, the Bill raises significant considerations for regulated and unregulated entities alike. Most importantly, potentially affected entities should consider whether an authorisation may be required in relation to any of their business lines. If so, management should carefully consider how best to structure their affairs to ensure both the authorisation process, and the significant consequent ongoing regulatory obligations, are dealt with in as stream-lined a manner as possible.5
The press release accompanying the Bill states that it will “…now proceed through the Oireachtas with the intention of being enacted later this year”. Assuming the Bill is enacted within that time-frame, this leaves a relatively tight window for affected businesses to ensure they are adequately informed and prepared.