New legislation in Ireland requires entities who are not credit institutions and who are carrying on certain loan servicing activities to be regulated by the Central Bank as a credit servicing firm. The stated objective was to address issues arising from the sale of loan books to unregulated entities where consumers might be unprotected and to control servicing of these by unregulated entities. However, this new act may have a broader and perhaps unintended scope with possible application to various forms of peer to peer lending and loan note transactions where the lender is not a credit institution or otherwise regulated as a lender.
The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 provides a new definition of a ‘credit servicing firm’ which includes:
• A person who undertakes credit servicing other than on behalf of a regulated financial service provider; or
• A person who holds legal title to credit granted under a credit agreement in respect of which credit servicing is not being undertaken by a person authorised to carry on the business of a credit servicing firm.
A ‘credit agreement’ means an agreement whereby a creditor grants, or promises to grant, credit to a relevant borrower.
A ‘relevant borrower’ means:
• A relevant person (being a natural person other than one who is, or satisfies the criteria to elect to be treated as, a professional client for the purposes of the European Communities (Markets in Financial Instruments) Regulations 2007 (MIFID); or
• A micro, small or medium sized enterprise within the meaning of Article 2 of the Annex to Commission Recommendation 2003/361/ but only to the extent that the credit granted to it under the credit agreement concerned was provided by an authorised financial service provider, authorised to provide credit in the State.
This definition covers SME borrowers whose loans are being transferred from a regulated lender as well as new loans from an unregulated lender to borrowers who are individuals, other than professional clients.
MIFID professional clients excluded. Excluded from the definition of ‘relevant borrower’ are professional clients under MIFID. Professional clients under MIFID include entities authorised or regulated to operate in the financial markets as credit institutions, investment firms or pension funds and management companies of such funds. They also include clients who request such treatment and can claim two out of the following three criteria:
(1) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(2) the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds €500,000;
(3) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
Micro, small or medium sized enterprises included. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.
‘Credit servicing’ covers a range of services connected to administering portfolios of loans. In relation to a credit agreement, it means managing or administering the credit agreement, including:
a) notifying the relevant borrower of changes in interest rates or in payments due under the credit agreement or other matters of which the credit agreement requires the relevant borrower to be notified,
b) taking any necessary steps for the purposes of collecting or recovering payments due under the credit agreement from the relevant borrower,
c) managing or administering any of the following:
i. repayments under the credit agreement;
ii. any charges imposed on the relevant borrower under the credit agreement;
iii. any errors made in relation to the credit agreement;
iv. any complaints made by the relevant borrower;
v. information or records relating to the relevant borrower in respect of the credit agreement;
vi. the process by which a relevant borrower’s financial difficulties are addressed;
vii. any alternative arrangements for repayment or other restructuring;
viii. assessment of the relevant borrower’s financial circumstances and ability to repay under the credit agreement,
d) communicating with the relevant borrower in respect of any of the matters referred to in paragraphs (a) to (c).