EU Credit Servicing Directive – Irish Transposition - Financial Services

The Directive on Credit Servicers and Credit Purchasers (Directive (EU) 2021/2167, the "Directive") applies to the sales and servicing of non-performing loans ("NPLs") issued by a credit institution established in the EU. The Directive was due to be transposed into the national laws of each of the EU member states, including Irish law, by 29 December 2023. We have previously provided updates and more detailed analysis on the Directive as it has progressed through the legislative process: in June 2021, August 2021, November 2021, September 2023 and October 2023 respectively.

Is there an existing Irish credit servicing regulatory framework?

There is an existing Irish credit servicing regulatory framework (which was introduced by the Irish Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the "2015 Act") and amended further subsequently in 2018 and 2022) under Part V of the Irish Central Bank Act 1997. Unregulated purchasers of Irish SME loans originated by regulated entities and loans with natural persons ("In Scope Loans") are obliged following the introduction of the 2015 Act to appoint an authorised credit servicing firm to service these loans. The Irish Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 introduced an additional authorisation requirement for legal title holders of and persons who hold strategic control over In Scope Loans. The authorisation regime was further expanded under the Irish Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 to cover deferred payment or other similar financial arrangements (including the letting of goods) and other financial accommodation similar to loans with natural persons and SMEs as well as hire purchase agreements and consumer-hire agreements with natural persons.

Who should be interested in the Directive?

The Directive is of particular interest and importance to:

EU credit institutions (i.e. banks and institutions that accept deposits from the public) who intend to sell NPLs;
the purchasers of NPLs originated by EU credit institutions;
entities servicing such NPLs (i.e. NPLs originated by EU credit institutions) on behalf of purchasers; and
facility agents and / or security trustees under syndicated loan agreements.

What is the definition of NPL?

The definition of NPL in the Directive is a credit agreement that has been classified as non-performing in accordance with Article 47a of the EU Capital Requirements Regulation. In very general terms and for this purpose, a credit agreement becomes non-performing when:

the borrower is assessed as unlikely to repay in full without realisation of collateral; or
more than 90 days have passed without the borrower paying the agreed instalments; or
it is otherwise considered impaired in accordance with the applicable accounting framework.

Has Ireland transposed the Directive?

Ireland transposed the Directive via the European Union (Credit Servicers and Credit Purchasers) Regulations 2023 (the "Credit Servicing Regulations") on 21 December 2023 and with an effective date of 30 December 2023.

The Credit Servicing Regulations clarify a few important points as part of the transposition of the Directive under Irish law, as follows:

The Central Bank of Ireland has been designated as the national competent authority under the Credit Servicing Regulations.
The existing Irish credit servicing regulatory framework will operate alongside the new EU regime – effectively creating two parallel regimes. The existing domestic regulatory regime for credit servicers and credit purchasers (including the obligation of the legal title holder of loans to be authorised) continues to apply to matters and agreements not expressly covered by the scope of the Credit Servicing Regulations.
There are now two separate authorisation regimes for credit servicers in Ireland. The first is the existing regime for authorised credit servicing firms under Part V of the Irish Central Bank Act 1997. Unless they are regulated financial service providers authorised to provide credit in Ireland, credit servicers need to be authorised under this regime if they carry out credit servicing activities which come within the scope of the existing regime and that go beyond the scope of the Credit Servicing Regulations. The second is the new regime for authorised credit servicers under the Credit Servicing Regulations. If credit servicers carry out credit servicing activities that fall within the scope of the Credit Servicing Regulations (i.e. the servicing in Ireland of NPLs originated by EU credit institutions on behalf of purchasers who are not EU credit institutions) and are not otherwise exempt, they will need to be either (i) authorised as a credit servicer under the Credit Servicing Regulations or (ii) authorised as a credit servicer under the equivalent transposing regulations for the Directive in a different EU member state and passport that authorisation into Ireland under the terms of the Credit Servicing Regulations.
Credit servicing firms that were authorised under Part V of the Irish Central Bank Act 1997 before 30 December 2023 are deemed to be authorised as credit servicers under the Credit Servicing Regulations. This is an important concession for the (approximately 20) Irish credit servicers currently operating under the existing regime.

What issues remain uncertain?

There are some uncertainties about how the new rules will operate in practice. These issues may in due course be addressed through guidance from the European Commission, the European Banking Authority or national regulators and common industry approaches or market practices. To date, no regulatory guidance has been issued.

Some of the issues of uncertainty are as follows:

Timing Issues – There are a number of timing issues that create a lack of clarity, including (i) whether the Directive and the Credit Servicing Regulations apply solely to NPLs first transferred by an EU credit institution on or after 30 December 2023, or whether they also apply to resales of NPLs on or after 30 December 2023 even where the NPLs were first transferred by an EU credit institution prior to 30 December 2023; and (ii) whether the obligation on EU credit institutions selling NPLs to provide "necessary information" regarding the selling credit institution's rights under the NPLs and any collateral to prospective credit purchasers to enable the prospective credit purchasers to assess the value of those rights and the likelihood of recovery applies solely in respect of NPLs that were originated on or after 1 July 2018 and separately for NPLs that became non-performing on or after 28 December 2021 (as per the rules applying to the new disclosure templates to be used by credit institutions selling non-performing loans and set out in the adopted implementing technical standards under the Directive (the "ITS") and which you can read more about here) or whether it applies to all NPLs whenever concluded.
Identification of NPLs - The responsibility and time for determining that loans are non-performing, particularly in the context of resales of loans and where credit institutions hold loans in their trading books is unclear.
Facility Agents/Security Trustees - On an objective reading, facility agents and / or security trustees under syndicated loan agreements might be construed as subject to the duties of credit servicers in an enforcement or distressed scenario. This may make it more difficult for non-EU entities (including UK and US entities) to perform the roles of security trustee and / or facility agent on loan transactions where there is an EU credit institution in the original syndicate.
Application to Non-EU Credit Institutions - It is unclear whether and how the obligations on credit institutions and credit purchasers will apply to non-EU credit institutions (in particular, those with a branch in the EU).
Reperforming Loans – It is unclear whether if NPLs cease to be non-performing at some point after being sold, they will fall outside of or remain within the obligations set out in the Directive and the Credit Servicing Regulations. If loans continuously alternate between being performing and non-performing, do they fall into and fall outside of the Directive and the Credit Servicing Regulation on an ongoing basis?
Interaction with ITS - The interaction between the ITS and the Directive remains unclear. Where the ITS are stated not to apply to sales of NPLs (such as sales of NPLs where the EU Securitisation Regulation applies or sales of NPLs as part of complex transactions relating not only to NPLs), can it be taken then that the Directive and the Credit Servicing Regulations do not apply or is the exclusion of certain specified types of NPLs sales from the scope of the ITS actually evidence that these types of sales of NPLs are otherwise within scope of the Directive and the Credit Servicing Regulations?

How do we see the Directive and the Credit Servicing Regulations overall?

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 justified to reduce the build-up of NPLs within EU credit institutions and to maintain the stability of EU credit institutions. It does so by creating a framework to help foster a secondary market in NPLs, while ensuring this will not adversely affect borrowers. We view this as an important objective.

There is a possibility that, in the absence of clear guidance being provided by the European Commission, the European Banking Authority or national regulators, the new obligations being imposed upon EU credit institutions selling NPLs and on purchasers and servicers of those NPLs may actually deter some EU credit institutions from selling or some purchasers from buying NPLs. This is particularly the case in Ireland where there are now two parallel, yet different, regimes in operation. It will require purchasers, sellers and servicing firms to give careful thought as to how best to structure transactions and ongoing arrangements to ensure compliance with dual Irish and EU regimes. Resolving the concerns around whether the activities of facility agents and security trustees are caught by the Directive and the Credit Servicing Regulations is also an important step that needs to be taken – we think that these activities were probably not originally intended to fall within the ambit of the Directive but may have been swept in unintentionally by broad drafting.

That said, we welcome the clarifications included in the Irish transposing legislation. We expect that the stakeholders in the market will be able to work through the uncertainties and challenges that remain in a sensible and pragmatic way.

We are continuing to keep a close eye on developments in this area and will publish further updates as matters progress.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.