This article is relevant to providers of auto finance, hire-purchase finance and “buy now, pay later” finance or those who lend to such lenders.
The Irish Government published its proposals for changes to the Irish retail credit and credit servicing regimes in Part V of the Central Bank Act 1997 (the “CBA 1997”) earlier this summer. These proposals are included in the Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (the “Bill”). Most of the parliamentary discussion of the Bill to date has focused on the Bill’s proposed regulation of providers of personal contract plan (PCP) finance (viewed as a form of hire-purchase finance) and “buy now, pay later” finance, in each case, to natural persons (ie non-corporate borrowers) in Ireland. However, the Bill’s application is likely to affect a broader section of finance providers and servicers operating in the Irish market. This article discusses the features of the Bill and certain issues that finance providers, servicers and other market participants are likely to want to consider.
Summary of key issues
- The Bill will require all existing and future non-bank providers of auto finance (and other providers of consumer-hire, hire-purchase and “buy now, pay later” finance to natural persons in Ireland) to seek specific authorisation from the Central Bank of Ireland (the “CBI”) as a retail credit firm;
- Existing finance providers falling into the categories mentioned immediately above can seek temporary transitional authorisation status by applying for authorisation within three months of the coming into operation of the Bill;
- The Bill will require all existing and future servicers of, legal title holders of and persons who hold strategic control over, consumer-hire, hire-purchase and “buy now, pay later” products to seek specific authorisation from the CBI as a credit servicing firm (unless exempted from the requirement to do so);
- Existing servicers of, legal title holders of and persons who hold strategic control over, consumer-hire, hire-purchase and “buy now, pay later” products can seek temporary transitional authorisation status by applying for authorisation within three months of the coming into operation of the Bill;
- All hire-purchase agreements will have to contain a statement of the relevant APR or may be unenforceable; and
- Any providers of finance that may provide finance “indirectly” to natural persons in Ireland should seek regulatory advice.
Expansion of the definition of “credit”
To achieve this new regulation, the Bill proposes to significantly expand the definition of “credit” in Part V of the CBA 1997 to broadly align this definition with the definition of the same term in the Consumer Credit Act 1995 (“CCA 1995”). This change will expand the definition of “credit” in Part V of the CBA 1997 beyond just “cash loans” to also include “deferred payments” and “other similar financial accommodation”. The term “financial accommodation” is not exhaustive in its definition so its scope is potentially very broad. With some limited exceptions, this expansion will result in practically all types of credit (performing and non-performing) coming within the scope of:
(i) the retail credit regime provided that the “relevant person” test in Part V of the CBA 1997 is satisfied in respect of
the relevant credit; and
(ii) the credit servicing regime provided that the “relevant borrower” test in Part V of the CBA 1997 is satisfied in
respect of the relevant credit.
As a reminder, a “relevant person” is a natural person in Ireland regardless of whether or not the finance provider to that natural person is regulated, and a “relevant borrower” is either (a) a natural person in Ireland regardless of whether or not the finance provider to that natural person is regulated, or (b) an SME satisfying certain specified criteria, where the relevant finance provider to that SME is regulated.
Regulation of providers of consumer-hire and hire-purchase products
It is proposed that the definition of “retail credit firm” be expanded to include persons who enter into consumer-hire agreements and hire-purchase agreements (which is intended to include PCPs), in each case, with natural persons in Ireland. The definition of “consumer-hire agreements” will exclude agreements of three months or less duration for the hire of goods, such as, for example, short-term car or equipment hire.
This aspect of the Bill seeks to implement a 2018 report commissioned by the Irish Government that recommended that certain provisions of the “Consumer Protection Code” of the CBI, in particular the provisions which require finance providers to assess the suitability of the product for the consumer and also the ability of the borrower to repay the debt over the duration of the relevant credit agreement, should be extended to PCP agreements and other forms of hire-purchase agreements. Regulating providers of consumer-hire and hire-purchase products will give the CBI the power to apply the “Consumer Protection Code” to such finance providers and strong enforcement powers, including the power to apply administrative sanctions for breaches of the “Consumer Protection Code”.
Regulation of providers of indirect finance
The Bill proposes to expand the definition of “retail credit firm” to include providers of “indirect” credit to natural persons in Ireland. This aspect of the Bill is an attempt to bring the providers of “buy now, pay later” finance within the scope of the business of a “retail credit firm” and therefore subject to the authorisation requirements imposed by Part V of the CBA 1997. “Cash loans” are not typically advanced to the customer in many of the most popular “buy now, pay later” finance arrangements offered in the Irish market. Instead, these finance arrangements typically involve the finance provider entering into a finance agreement with the relevant customer whereby the finance provider pays the purchase price of the relevant goods or services to the relevant retailer and the relevant customer agrees to repay the purchase price to the finance provider together with interest. These provisions are very much aimed at regulating firms whose main purpose is to act as “buy now, pay later” finance providers, as helpfully there is an exemption for trade credit issued by retailers to their business customers provided it is repaid within 6 months. However, for the reasons set out below, the reference to “indirect” credit used in the Bill may nonetheless pose issues for other market participants.
Transitional provisions for existing unregulated providers of credit
Existing unregulated providers of credit (including providers of consumer-hire and hire-purchase products and “buy now, pay later” finance) will need to obtain an authorisation from the CBI to continue their business after the coming into operation of the provisions of the Bill. These existing providers of credit will be taken to be authorised to carry on the business of a retail credit firm where they apply to the CBI for authorisation as a retail credit firm no later than three months after the coming into operation of the provisions of the Bill. Such applicants will be taken to be authorised to carry on the business of a retail credit firm until the CBI subsequently either grants or refuses their authorisation. However, as the application process is both extensive and lengthy, existing unregulated providers of credit should engage with their advisors as soon as possible to prepare for the application process.
Expansion of the scope of the Irish credit servicing regime
The provisions of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 and the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018 introduced a CBI authorisation requirement, broadly, for:
(i) persons servicing “cash loans” made to natural persons in Ireland and SME “cash loans” originated by regulated
entities; and
(ii) legal title holders of, and persons who hold strategic control over, “cash loans” made to natural persons in Ireland
and SME “cash loans” originated by regulated entities.
As a result of the expansion of the definition of “credit” mentioned above, the Bill proposes to significantly broaden the scope of assets which require servicers of such assets, legal title holders of such assets and persons who hold strategic control over such assets, in each case, to have an authorisation from the CBI. The Bill proposes that assets falling within the scope of this expanded Irish credit servicing regime will include consumer-hire and hire-purchase products.
Any unregulated entities whose existing activities will fall within the business of a “credit servicing firm” as a result of the expansion of the definition of “credit” will be taken to be authorised to carry on the business of a credit servicing firm where they apply to the CBI for authorisation as a credit servicing firm no later than three months after the coming into operation of the provisions of the Bill. Such applicants will be taken to be authorised to carry on the business of a credit servicing firm until the CBI subsequently either grants or refuses their authorisation.
As a result of these proposed changes, practically all servicers of, legal title holders of and persons who hold strategic control over, any credit provided to natural persons in Ireland and SMEs (where the credit provided to the SME was originated by a regulated entity) will be required to have an authorisation from the CBI. Servicers of, legal title holders of and persons who hold strategic control over, such assets should analyse their historic transactions and any upcoming transactions to assess whether they will fall within scope. A significant amount of time may be required to carry out this analysis so affected market participants should commence this analysis as soon as possible. Consideration should be given to restructuring any in-scope existing transactions before the coming into operation of the provisions of the Bill to minimise the number of additional authorisations or permissions that are required by the transaction parties thereto after the coming into operation of the provisions of the Bill. Unregulated beneficial title holders of in-scope assets should be mindful of “perfection events” in transaction documents which require the legal title holder to transfer its legal title to the in-scope assets to the beneficial title holder following the occurrence of certain specified triggers, such as, for example, the legal title holder ceasing business or suffering an event of default.
The existing limited exemption from the requirement to obtain a credit servicing firm authorisation for “securitisation special purpose entities” established for “securitisations” (within the meaning of the EU Securitisation Regulation) will remain in place and will be extended to “securitisation special purpose entities” established for “securitisations” of consumer-hire and / or hire-purchase products.
Amendments to the CCA 1995
The Bill proposes to make certain changes to the CCA 1995. Where a credit agreement (other than a “moneylending agreement” within the meaning of the CCA 1995) or hire-purchase agreement, in either case, entered into after the coming into operation of the provisions of the Bill contains an applicable APR of greater than 23%, the relevant finance provider shall not be entitled to enforce:
(i) the relevant credit agreement or hire-purchase agreement;
(ii) any security interest or guarantee relating to the relevant credit agreement or hire-purchase agreement; or
(iii) any right to recover the goods from the hirer.
However, a court will have discretion in limited circumstances to decide that a credit agreement or a hire-purchase agreement shall be enforceable where there is non-compliance with this APR cap.
The Bill proposes that hire-purchase agreements within the scope of the CCA 1995 entered into after the coming into operation of the provisions of the Bill must contain a statement of the relevant APR. Providers of hire-purchase finance shall not be entitled to enforce any hire-purchase agreement, any security interest or guarantee relating thereto or any right to recover the goods from the hirer where the required statement of the APR in respect of the relevant hire-purchase agreement has not been included. Again, a court will have discretion in limited circumstances to decide that a hire-purchase agreement shall be enforceable where the required statement of the APR in respect of the hire-purchase agreement has not been included.
Issues for market participants
There are a number of proposals in the current draft of the Bill which may give rise to issues for finance providers, servicers and other market participants.
Indirect Credit
As discussed above, the definition of “retail credit firm” will be expanded to include providers of “indirect” credit to natural persons in Ireland. The Irish Government’s press release in respect of the Bill clarified that this is intended to bring a “lender provid[ing] credit to the borrower by paying a retailer for the purchase of a good” (ie “buy now, pay later” finance) within the scope of the business of a “retail credit firm”. However, the reference to providers of “indirect” credit needs to be more focused to ensure that only providers of “indirect” credit who enter into finance agreements with customers who are natural persons in Ireland (which, as explained above, is typically how “buy now, pay later” finance is documented) fall within the scope of a “retail credit firm”. The reference to “indirect” credit by itself is vague and could suggest that, for example, international providers of wholesale or warehouse finance to an authorised retail credit firm operating in Ireland must themselves seek authorisation as a retail credit firm where the authorised retail credit firm uses the funding that it has raised to lend to natural persons in Ireland.
Carrying on the business of a retail credit firm without authorisation is a criminal offence. The activities constituting the business of a retail credit firm should therefore be specified with precision in the Bill. Interpretative guidance issued by the CBI alone is not an appropriate way to address this issue.
Transitional provisions for existing regulated businesses carrying on the business of a credit servicing firm
Some of the transitional provisions in the Bill in respect of the credit servicing regime may be of limited scope in practice. The provisions of the Bill suggest that existing regulated finance providers and existing authorised credit servicing firms will be required to engage with the CBI to obtain additional permissions from the CBI in certain cases. It would be helpful if the Bill stated these requirements for existing regulated firms in more express terms.
Firstly, it seems as if existing regulated financial service providers authorised by the CBI (or comparable EEA authorities) to provide credit in Ireland will be taken to be authorised to carry on the business of a credit servicing firm only in so far as the relevant assets subject to such credit servicing do not include, broadly, consumer-hire or hire-purchase products. This suggests that regulated financial service providers currently authorised by the CBI (or comparable EEA authorities) will need to engage with the CBI to obtain additional permissions in order to be taken to be authorised to perform credit servicing in respect of consumer-hire and hire-purchase products.
Secondly, it appears to be the intention that existing authorised credit servicing firms will be taken to be authorised to carry on the business of a credit servicing firm only in so far as the relevant assets subject to such credit servicing do not include, broadly, consumer-hire or hire-purchase products. This means that existing credit servicing firms currently performing credit-servicing-like-activities in respect of consumer-hire and hire-purchase products will need to engage with the CBI to obtain additional permissions to perform credit servicing in respect of consumer-hire and hire-purchase products after the coming into operation of the provisions of the Bill.
Firms performing credit-servicing-like-activities in respect of consumer-hire and hire-purchase products immediately before the coming into operation of the provisions of the Bill will be taken to be authorised to carry on the business of a credit servicing firm in respect of consumer-hire and hire-purchase products where they apply to the CBI for authorisation as a credit servicing firm in respect of consumer-hire and hire-purchase products no later than three months after the coming into operation of the provisions of the Bill. Such applicants will be taken to be authorised to carry on the business of a credit servicing firm in respect of consumer-hire and hire-purchase products until the CBI subsequently either grants or refuses their authorisation. Firms not performing credit-servicing-like-activities in respect of consumer-hire and hire-purchase products immediately before the coming into operation of the provisions of the Bill will not be able to avail of this transitional authorisation.
Definition of “credit”
The Bill proposes a broad expansion of the definition of “credit” which will have implications for the scope of credit falling within the credit servicing regime. As discussed above, this expansion will result in practically all types of credit coming within the scope of the credit servicing regime provided that the “relevant borrower” test in Part V of the CBA 1997 is satisfied in respect of the relevant credit. This approach may lead to unintended consequences, in particular, where the “relevant borrower” test in Part V of the CBA 1997 is satisfied in respect of “credit” provided to an SME borrower.
It is hoped that a clear legislative exemption is made for credit provided to specialised borrowing companies, such as borrowers established for aircraft finance, securitisation or other complex transactions. These types of specialised borrowing companies are established to raise finance as part of sophisticated transactions usually involving international investors. These borrowers may often satisfy the specified criteria for SMEs in the “relevant borrower” test for a limited period of their lifetime. The regulatory protections afforded to borrowers whose credit come within the scope of the credit servicing regime should not be required where the credit is provided to specialised borrowing companies because of the sophisticated nature of their transactions.
We note that the definition of “credit” appears to be broad enough to capture credit provided in the form of consumer-hire and hire-purchase products ie, consumer-hire and hire-purchase products are a subset of “credit”. However, the current draft of the Bill makes a distinction between “credit” and “credit agreements” on the one hand and “consumer-hire agreements and hire-purchase agreements” on the other hand. This distinction appears in several places – including the proposed new definitions of “credit servicing”, “relevant activity”, “retail credit firm”, and the “securitisation special purpose entity” exemptions. These definitions and distinctions will need further refinement by legislators to avoid any confusion for market participants involved in the origination and servicing of consumer-hire and hire-purchase products.
Next Steps
The Bill will likely reach the Committee Stage in the Irish parliament in autumn 2021 where it is hoped that it will be refined to address the issues summarised in this article. The Irish Government intend for the Bill to be passed into law by the end of 2021. The Bill will likely be passed by the Irish parliament before the Irish Government publishes its proposals to implement the EU Credit Servicing Directive into Irish law, so further amendments to Part V of the CBA 1997 may well follow in due course. We will continue to keep these developments under review.
For further information, please contact Turlough Galvin, Joe Beashel, Ian O’Mara, Vincent McConnon, David Kiernan or your usual Matheson contact.
This article is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.