Credit Servicing: Will Ireland’s New Regime Be Fit for Purpose?

Ireland introduced domestic regulation of credit servicing firms ahead of many other EU jurisdictions. Credit servicers are service providers that act on behalf of lenders post-origination to manage the borrower relationship. Their role attracted political scrutiny following the collapse of Ireland’s banking system after 2010, when large numbers of non-performing loans (NPLs) were sold to purchasers of distressed debt securities. The purchasers appointed servicing firms to deal on their behalf with borrowers, with borrowers then fearing the loss of regulatory protections that would have continued to apply if the relationship had remained with the original lending bank. As a result, the servicing sector was brought within the scope of regulation, and the regime has since been expanded and strengthened.

While Ireland was establishing and strengthening its domestic regime, Europe-wide regulation of credit servicers was also on the EU’s agenda. The resulting EU Directive on credit servicers and credit purchasers is now scheduled for enactment by the end of 2023.

In Ireland, the Directive will need to be layered on top of the existing domestic regime and the Irish Department of Finance has recently sought feedback on its proposals in this regard through a public consultation. We provided a response to the public consultation in addition to separately contributing to industry submissions. In our view, there are some key implementation issues that should be kept on the Government’s radar to ensure that transposition of the Directive results in a sensible and efficient regulatory process that respects the essential interests of both business and consumers.

EU Directive on Credit Servicing

The purpose of the Directive is to develop a common framework within EU member states for the transfer and management of NPLs. EU legislative intervention in this area is, according to the EU institutions, justified to foster the development of a pan-EU secondary market and to remove obstacles to the cross-border transfer of NPLs. To achieve their objectives, the EU institutions had recourse to a traditional financial services technique – introducing a harmonised regulatory regime for firms operating in the sector. This regime included passporting rights to operate cross-border for those firms that satisfy the harmonised requirements.

The Directive will apply to the servicing and purchasing of NPLs originated by EU banks after the enactment of the Directive. It will not apply to the sale of performing loans, or to the sale of loans originated by non-credit institutions. These are key points from an Irish perspective since Ireland’s domestic credit servicing regulatory regime is currently broader than the Directive provisions and would apply in these situations.

Consultation Paper

The Department of Finance Consultation Paper was tightly drafted to focus only on those areas within the Directive where each EU member state has implementation discretions. Although important, these discretions do not address the main point of principle at issue when the Directive comes to be transposed into Irish law – should Ireland’s existing domestic regime, going well beyond the Directive requirements, be maintained, fully aligned with the Directive, or repealed?

Parts of the loan purchasing sector advocated during the consultation process that it should not, and that Ireland should fully align its laws post-transposition with the Directive requirements. If Ireland were to do so, this would require the repeal of much of our current law. In our view that outcome is unlikely, largely because of the political objections that would be raised in the Irish Parliament, where politicians on the left still regularly raise concerns regarding the actions of firms operating on the secondary loan market.

Gold plating or future proofing?

Traditionally, in other areas, Ireland has adopted a “faithful transposition” approach to EU financial services directives, avoiding “gold plating”. “Gold plating” is the term used where an EU Member State goes beyond directive requirements to introduce a higher level of regulation at domestic level. In this instance, however, Ireland has applied “gold plating” to the EU directives. Even though it would be attractive from the perspective of historical consistency with Ireland’s traditional approach to the EU directive implementation and as a sign of Ireland’s openness to international business, it is difficult to contemplate it being acceptable from a wider societal perspective for the current “gold plating” to be removed. Certain categories of Irish borrowers whose loans would fall outside the scope of the Directive currently benefit from substantial domestic regulatory protections, e.g., under the CBI’s Consumer Protection Code. Therefore, Ireland might find it challenging to revert to a legal regime under which those protections could be lost if the relevant loans were to be sold.

Conclusion

The existence of two parallel regimes for the regulation of the same financial sub-sector could, of course, lead to confusion. It is here that we think the Department of Finance should focus its efforts when designing the new regime. We expanded on this in our consultation response, but in brief, we think that the Government should mandate the CBI to align the conduct of business rules under both the “Directive” and the “domestic” regimes. Essentially, this would:

• Allow for the operation of a single authorisation process
• Align the scope of regulated activities across the two regimes by adopting the Directive definition of “servicing activities” and
• Repeal the current domestic requirement for the holder of legal title to loans to be separately regulated.

A sensible and streamlined authorisation and regulatory oversight process could do much to mitigate the inefficiencies that will otherwise inevitably result from two parallel regulatory regimes covering similar, but not quite identical, financial activities.

For more information on the likely impact of the EU Directive following its enactment on your operations, contact a member of our Banking or Financial Regulation teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.