1. What is the Government’s objective?

The Government’s objective is to ensure that borrowers whose Irish retail credit loans are sold by a regulated financial service provider to an entity that is currently an unregulated entity maintain the same regulatory protection that they had prior to the sale, including protection under various Central Bank of Ireland (‘CBI’) codes (including the Code of Conduct on Mortgage Arrears and the Consumer Protection Code) and access to the Financial Services Ombudsman. Currently, when an Irish retail credit loan book is sold by a regulated financial service provider to an unregulated entity the borrowers lose these protections.

  1. What legislative change is proposed to achieve this objective

The draft legislation would make the ownership of Irish retail credit loans a newly regulated activity which would require CBI authorisation. The definition of ‘retail credit firm’ would be extended to include firms which own Irish retail credit loans. The existing definition of ‘retail credit firm’ (which was designed to bring certain non-deposit taking lenders to individuals in Ireland under CBI regulation) is confined to providing (rather than owning) Irish retail credit loans. The effect of this change would be that the owner of Irish retail credit loans would become a regulated financial service provider and would be bound by relevant CBI codes and the CBI would be able to impose sanctions against it for non-compliance. The affected borrower would continue to enjoy regulatory protections that it had before the Irish retail credit loan book sale including protections under the CBI codes and access to the Financial Services Ombudsman.

  1. Are any exclusions proposed?

One proposed exclusion from the revised definition of ‘retail credit firm’ covers owners of Irish retail credit which are special purpose vehicles that do not take an active part in the management of loan books in which they hold beneficial ownership. This proposed exemption is narrowly worded and confined to securitisation special purpose entities that do not carry out loan book servicing activities. This narrow wording could prevent many SPV purchasers of Irish retail credit loan books from availing of the exemption thereby requiring them to obtain authorisation from the CBI as a retail credit firm.

Another proposed exclusion from the revised definition of ‘retail credit firm’ applies to a regulated financial service provider authorised by the CBI or another EEA regulator to provide or own credit.

  1. Why is it not proposed to rely on voluntary compliance by loan book purchasers with consumer protection measures?

While acknowledging that a number of purchasers of Irish mortgage loan books have committed on a voluntary basis to abide by the CBI Code of Conduct on Mortgage Arrears, concerns include (i) that this is not the same as the consumer having the right to the protection of the CBI codes, (ii) that there is no guarantee that the new owner of an Irish retail credit loan book will apply the CBI codes correctly, (iii) that the CBI is not empowered to apply sanctions against an unregulated entity for non-compliance and (iv) that referral of disputes to the Financial Services Ombudsman cannot apply in cases of voluntary compliance.

  1. Why is it not proposed to create a new regulated activity of servicing mortgage loan books?

The Department of Finance rejected this option because it would require the introduction of a new set of authorisation requirements and ongoing standards for loan book servicers and new consumer protection standards that would apply to the newly regulated activity. It could also require amendments to existing CBI codes. All of this would delay the introduction of the changes.

  1. Why is it not proposed to make it a pre-condition to the sale or transfer of Irish retail credit loan books to an unregulated entity that such entity agrees to be bound by the relevant CBI codes and permits access to the Financial Services Ombudsman?

The Department of Finance rejected this option because (i) the CBI does not have statutory power to impose sanctions on entities that are not regulated by it and (ii) the Financial Services Ombudsman does not have statutory power to deal with complaints from unregulated financial service providers. Primary legislation would be required to change this, resulting in lengthy delays.

  1. What effect will the proposed legislation have on the buyers of Irish retail credit loan books?

New owners will bear increased compliance costs associated with becoming a regulated financial service provider including authorisation costs, levies from the CBI and the Financial Services Ombudsman and ongoing costs to ensure compliance with regulatory requirements (e.g. structures, procedures, systems, training etc).

  1. Will foreign entities be permitted to purchase Irish retail credit loan books?

Yes though both Irish and non-Irish purchasers of Irish retail credit loan books will come within the scope of the new requirements. Also, under section 31A(f) of the Central Bank Act 1997 (as amended), retail credit firms must be capable of being supervised by the CBI. The CBI requires that retail credit firms maintain a presence in the State and the precise requirements of the CBI regarding the level of presence in Ireland that a non-Irish purchaser of an Irish retail credit loan book would be required to maintain is not yet clear. It should be noted that it is a criminal offence for an unauthorised entity to provide financial services in Ireland which would require authorisation under the relevant legislation.

  1. Is the legislation retrospective?

Although the legislation is not stated to be retrospective it will apply to all owners of Irish retail credit loans, regardless of when they were acquired, thereby capturing entities which have already purchased Irish retail credit loan books. It is proposed that a grandfathering arrangement will apply to unregulated entities which own Irish retail credit loans at the date the draft legislation comes into effect. Such entities would be deemed to be authorised at the date on which the new regime comes into effect but they would have to apply to the CBI for authorisation within three months of that date.

  1. How has industry reacted to the proposals?

The proposals were only published in late July 2014 and while acknowledging the need for reform, some industry sources have expressed certain initial concerns including: 

  • that the scope of the requirement for authorisation is disproportionately broad and that it should be limited to regulating the activity of servicing Irish retail credit loan books rather than owning Irish retail credit loan books (i.e. it should be aligned with the approach in the UK);
  • that the draft legislation may have unintended consequences and that many existing SPV purchasers of Irish retail credit loan books are simply not set up to be regulated entities (e.g. in their ownership structure) or to comply with regulatory requirements on an ongoing basis (e.g. in their management structure).
  1. What are the parameters of the consultation?

The Department of Finance invites submissions on the following questions to be sent to consumer.protection@finance.gov.ie no later than 22 August 2014:

  • Question 1 – do you think that the proposed approach will provide appropriate protections for mortgage holders whose loans are sold on?
  • Question 2 – Can you identify positive and negative impacts of the proposed approach?
  • Question 3 – Do you think that the proposed approach is the best way to ensure that the protections enjoyed by mortgage holders with regulated entities are maintained when their loans are sold on? If not, what approach would you adopt?
  • Question 4 – Will the proposed approach have any impact on the choice between outsourcing collection and selling on a loan book?
  • Question 5 – Please provide details of any further work or future challenges you can identify with this issue.