EU Directive 2021/2167 introduces a standardized regulatory framework for managing non-performing loans (NPL) across Member States, with implementation required by 29 December 2023. This forthcoming regulatory framework is poised to reshape NPL markets within the European Union. As of now, only a few EU member states have made public their draft legislation for implementing the Credit Servicers Directive (CSD) into national law. Germany, for example, disclosed the draft Credit Service Institutions Act on 20 July2023. This draft designates the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank with the responsibility for overseeing Credit Servicers and Credit Purchasers.
The CSD introduces a harmonized regulatory framework for NPL-transactions between banks, Credit Purchasers and firms providing NPL-related services. The CSD aims at creating a deep and liquid secondary market for distressed assets in the EU that provides banks with the possibility to reduce their NPL stocks by selling portfolios to third-party investors. However, the CSD also regulates Credit Purchasers and firms that support Credit Purchasers in their interaction with borrowers.
The new regulatory framework specifically pertains to transactions and services directly associated with non-performing credit agreements, commonly referred to as NPLs. According to Article 3(13) of the CSD, a non-performing credit agreement is defined as a “credit agreement that is classified as a non-performing exposure in accordance with Article 47a of Regulation (EU) No 575/2013,” known as the Capital Requirements Regulation (CRR). These non-performing exposures encompass instances where (i) a default has been deemed to occur or (ii) exposures are considered impaired under the applicable accounting standards.
It’s worth noting that both the CSD and the draft of German Credit Service Institutions Act exclusively address non-performing credit agreements that meet two criteria: (i) they were initially issued by credit institutions established within the EU and (ii) the initial transfer of these agreements or the initial assignment of rights under such agreements occurred on or after 30 December 2023.
DEFINITIONS OF ENTITIES
The CSD provides precise definitions for the key entities involved in NPL transactions:
- Credit Servicer: Credit Servicers are entities engaged in credit servicing activities, as per Article 3(8) of the CSD. These entities are responsible for managing and enforcing the rights and obligations arising from non-performing credit agreements on behalf of a Credit Purchaser.
- Credit Servicer Institutions: Credit Servicer Institutions refer to firms authorized to carry out credit servicing activities on behalf of Credit Purchasers under licenses provided by the CSD/Draft KrDIG. It’s important to note that this definition explicitly excludes credit institutions subject to the CRR, Alternative Investment Fund Managers (AIFM), and certain non-banking entities conducting activities that generally fall within the scope of Credit Services as defined in the CSD.
- Credit Servicer: Notably, credit institutions subject to the CRR and certain non-banking entities conducting Credit Services activities, while not classified as Credit Servicer Institutions, are still subject to specific requirements outlined in the CSD/Draft KrDIG, including conduct rules. To account for this, the Draft KrDIG in Germany introduces the term “Credit Servicers,” which encompasses both Credit Servicer Institutions and CRR credit institutions, as well as non-banking entities subject to particular requirements stipulated in the CSD.
- Credit Purchaser: refers to any individual or legal entity, excluding credit institutions, that acquires a creditor’s rights associated with a non-performing credit agreement or the non-performing credit agreement itself. This acquisition takes place within the scope of their trade, business, or professional activities, in adherence to relevant EU and national legal regulations.
ENTITIES OUT OF SCOPE
The CSD contains exemptions for certain entities that, based on the definition, would ordinarily fall under its regulatory purview. The rationale behind these exemptions can be attributed to a variety of factors, including the existence of established supervisory frameworks, prevailing market standards, and considerations related to operational efficiency.
CREDIT SERVICES
In the context of the CSD, “Credit Services” are delineated as credit servicing activities. The CSD furnishes a comprehensive list of activities that qualify as such. Importantly, a prospective Credit Servicer only needs to engage in one of these activities to come under the regulatory purview of the CSD. In other words, undertaking any one of the specified credit servicing activities subjects an entity to the regulations stipulated in the CSD:
- Collection and/or Recovery of payments
- Renegotiating terms with the borrower
- Administration of complaints
- Notification of the borrower of changes
REQUIREMENTS
Article 4 of the CSD mandates that Credit Servicers must obtain authorization from the National Competent Authority (NCA) in their respective home Member State before commencing their operations. In essence, the following criteria must be provided:
- Trustworthiness and Expertise: Credit Servicers must demonstrate the trustworthiness, as well as the adequate knowledge and experience, of their board members and supervisory board.
- Good Reputation of Qualifying Holders: Evidence of the good reputation of individuals or entities holding qualifying holdings in the applicant, specifically those holding 10% or more of its share capital.
- Separate Fund Holding Accounts: If the applicant plans to hold funds from borrowers on behalf of Credit Purchasers, they must furnish evidence of separate accounts designated for holding these funds.
- Viable Business Plan: A viable business plan must be provided, outlining the intended business activities, governance structure, and arrangements designed to ensure compliance with organizational requirements.
- Information on Outsourcing Arrangements: Details concerning outsourcing arrangements and any associated outsourcing agreements should also be included as part of the authorization application.
These requirements are essential to confirm that Credit Servicers possess the necessary qualifications, integrity, and operational capacity to conduct their activities responsibly and in accordance with regulatory standards.
Outlook
In the foreseeable future, both existing firms already operating within the purview of the CSD and those contemplating entering the realm of activities regulated by the CSD will encounter a regulatory landscape that bears resemblance to the regulatory framework governing credit institutions, investment firms, and payment institutions. The core focus of the CSD centers on fit and proper requirements for key personnel and adherence to essential business rules. This regulatory emphasis differs from aspects such as own funds requirements, which hold less prominence within the CSD framework.
For some clients, it will be imperative to assess whether their business activities fall under the jurisdiction of the CSD. Those who anticipate that they will be subject to these requirements should initiate a gap analysis to ascertain their compliance with the forthcoming regulatory standards. Furthermore, it is advisable for clients to commence preparations for the application process to obtain any necessary licenses under this new regulatory regime as early as possible. Timely preparation and understanding of these regulatory requirements will be crucial for a smooth transition into this regulatory environment.
For additional information, you can contact us by sending an e-mail to office@petroviclegal.com.