Opinion of the European Central Bank of 19 October 2015 on the regulation of financial leasing and financial leasing companies’ activities (CON/2015/37)
Date: 2015-10-19
Institutions: European Central Bank
Subjects: Cyprus, banking supervision, credit institution, financial services, financial stability, national law, provision of services

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 19 October 2015  

on the regulation of financial leasing and financial leasing companies’ activities 

(CON/2015/37) 

Introduction and legal basis 

On 4 September 2015 the European Central Bank (ECB) received a request from the Minister of Finance 

of  Cyprus  for  an  opinion  on  a  draft  law  regulating  financial  leasing  and  financial  leasing  companies’ 

activities (hereinafter the ‘draft law’). On 28 September 2015 the ECB received a new version of the draft 

law from the Ministry of Finance. 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning  of  the  European  Union  and  the  third  and  sixth  indents  of  Article 2(1)  of  Council 
Decision 98/415/EC1,  as  the  draft  law  relates  to  the  Central  Bank  of  Cyprus  (CBC)  and  to  the  rules 

applicable  to  financial  institutions  insofar  as  they  materially  influence  the  financial  stability  of  financial 

institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of 

the European Central Bank, the Governing Council has adopted this opinion. 

1.  

Purpose of the draft law 

1.1  The purpose of the draft law is to regulate the provision of financial leasing services to the public 

and  ensure  the  regulation  and  supervision  of  financial  leasing  services  providers’  activities.  As 

noted in the explanatory memorandum accompanying the draft law, the  draft law aims to provide 

natural persons and businesses with alternative ways of financing, thus contributing to the growth 

of  the  leasing  services  sector  and  generally  the  financial  sector  and  the  Cypriot  economy  as  a 

whole.  

1.2  The  draft  law  provides  that  financial  leasing  services  may  be  provided  to  the  public  by: 

(a) authorised credit institutions in Cyprus; (b) authorised credit institutions in other Member States 

of the European Economic Area (EEA) which are licensed to provide financial leasing services, and 

which  provide  such  services  through  a  branch  or  on  a  cross-border  basis;  (c)  financial  leasing 

companies  which  are  subsidiaries  of  credit  institutions  established  in  EEA  Member  States,  and 

which provide such services in Cyprus through a branch or on a cross-border basis; and (d) a new 

category  of  regulated  entity  –  financial  leasing  companies  registered  in  Cyprus,  which  shall  be 
licensed by the CBC to provide such services under the draft law.2. The draft law sets out the types 

1  

2  

Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 

See Article 4(1) a of the draft law. 

 
 
 
 
                                                 
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of activities to be performed by those entities 3. Furthermore, the draft law defines the supervisory 

and regulatory powers of the CBC with respect to financial leasing companies, including the power 

to  take  enforcement  measures  and  impose  sanctions,  and  puts  in  place  a  comprehensive  legal 

framework  regulating  financial  leasing  service  providers  and  the  provision  of  financial  leasing 

services.  

1.3  The  draft  law  provides  that  financial  leasing  contracts  that  are  a  result  of  the  settlement  or 
restructuring of credit facilities are subject to terms and conditions determined by the CBC 4. In this 

respect,  in  relation  to  any  leasehold  described  in  the  contract,  the  financial  leasing  must  include, 

inter alia, the nominal and effective interest rate included in the rent, their calculation method and 
their amendment5.  

1.4  Pursuant to the draft law, a financial leasing company may provide both financial leasing services 

and  ancillary  services,  including  operating  leasing  services,  the  negotiation  and  purchase  of 

movable  or  immovable  property  for  the  purpose  of  sale  and  lease-back  transactions,  services  for 

the maintenance and safekeeping of property for leasing purposes, assignment of the manufacture 

or construction of buildings or premises for buying purposes in order to lease them, assignment of 

the  improvement  or  maintenance  of  buildings  or  premises  for  leasing  purposes,  and  any  other 

relevant services which may be determined by the CBC. A financial leasing company is not allowed 

to  provide  any  other  services  or  conduct  any  other  activities  other  than  those  necessary  for  the 

purposes of the provision of financial leasing services under the draft law, or to manufacture itself 
movable or immovable property6.  

1.5  Without affecting the duty of the CBC to keep information obtained under the draft law confidential, 

the  CBC  may  use  any  of  the  information  provided  under  the  draft  law  for  the  purpose  of  the 
preparation of anonymous, aggregated statistical data, which the CBC may publish7. 

1.6  The draft law provides that the CBC has the power, pursuant to directives issued by the CBC, to 
require that financial leasing companies pay to the CBC all costs related to their supervision8.  

2. 

General observations  

2.1  The ECB understands that the draft law may facilitate private debt restructuring by opening up the 

possibility  to  transform  mortgage  loans  into  real  estate  leases  through  sale  and  lease-back 

transactions,  and  potentially  impact  the  resolution  of  non-performing  loans  in  Cyprus.  In  this 

context,  it  is  welcome  that  financial  leasing  activities  are  going  to  be  subject  to  prudential 

supervision, also with a view to avoiding regulatory arbitrage. 

2.2  The  draft  law  expands  the  CBC’s  powers  to  supervise  financial  leasing  companies,  thus 

complementing  the  CBC’s  current  responsibilities  for  the  supervision  of  the  leasing  activities  of 

3  
4  
5  
6  
7  
8  

See Article 28(1) of the draft law. 
See Article 27(3) of the draft law. 

See Article 27(1)(d) of the draft law. 
See Article 8 and Second Table of the draft law. 
See Article 11(4) of the draft law. 

See Article 11(5) of the draft law. 

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licenced  credit  institutions  and  the  macroprudential  supervision  of  the  financial  system  for  the 

purpose of safeguarding financial stability. The ECB underlines that, in the context of a proposed 

conferral  of  tasks  on  an  ESCB  member,  it  is  necessary  to  assess  such  conferral  against  the 

prohibition  of  monetary  financing  under  Article  123  of  the  Treaty.  The  ECB  has  developed  the 

guidance  set  out  in  paragraphs  2.2.1  to  2.2.3  of  this  opinion,  in  the  form  of  general  and  specific 

considerations,  on  the  basis  of  which  it  may  decide  whether  a  new  task  conferred  on  an  ESCB 

national central bank (NCB) is to be considered a central banking task or a government task for the 

purposes  of  assessing  such  conferral  against  the  prohibition  of  monetary  financing  under 
Article 123  of  the  Treaty9.  The  concrete  assessment  of  whether  the  CBC’s  task  of  supervising 

financial leasing companies is to be considered a central banking task or a government task is then 

undertaken in paragraph 3.1 of this opinion. 

2.2.1  General considerations 

First,  the  systematic  categorisation  of  tasks  assigned  to  NCBs  as  central  banking  or  government 

tasks applies to genuinely new tasks that did not exist in the past or did not form an integral part of 

the  central  banking  tasks already  assigned  to  the  NCB  in  the  past.  In  recognition  of  the  different 

Member  States’  legal  frameworks,  central  banking  traditions  and  national  set-ups,  the  tasks 

currently discharged by an NCB as central banking tasks are not reviewed and re-categorised, but 

may be reassessed if they are subject to legislative amendments of substance. 

Second, the principle of financial independence requires that the Member States may not put their 

NCBs  in  a  position  where  they  have  insufficient  financial  resources  to  carry  out  their  ESCB-  or 

Eurosystem-related tasks, as applicable.  

Third, central banking tasks comprise in particular those tasks that are related to the tasks listed in 

Article 127(2), (5) and (6) of the Treaty. 

Fourth,  new  tasks  conferred  on  an  NCB  which  are  atypical  of  NCBs’  tasks,  or  which  are  clearly 

discharged on behalf of and in the exclusive interest of the government or of other public entities, 

should be considered as government tasks. In that context, a distinction should be drawn between 

liquidity-  and  solvency-related  tasks  of  NCBs.  While,  for  the  purposes  of  the  monetary  financing 

prohibition, solvency support is a government task, liquidity-related tasks, the ultimate objective of 

which are to finance the economy, are central banking tasks. 

2.2.2  Specific considerations 

Banking  supervision  and  macro-prudential  tasks  are  central  bank  tasks  when  discharged  by  an 

NCB  provided  they  do  not  undermine  its  independence  in  accordance  with  Article  130  of  the 

Treaty.  

An important criterion for qualifying a new task as a government task is the impact of the task on 

the institutional, financial and personal independence of the NCB. In particular, the following should 

be taken into account. 

First,  it  should  be  assessed  whether  the  performance  of  the  new  task  creates  inadequately 

addressed  conflicts  of  interests  with  existing  central  banking  tasks,  and  does  not  necessarily 

9  

See Opinion CON/2015/22. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 

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complement  those  existing  central  banking  tasks.  If  a  conflict  of  interest  arises  between  existing 

and  new  tasks,  there  should  be  sufficient  mitigation  in  place  to  adequately  address  that  conflict. 

Complementarity between the new task and existing central banking tasks should not, however, be 

interpreted  extensively,  so  as  to  lead  to  the  creation  of  an  indefinite  chain  of  ancillary  tasks. 

Complementarity should also be examined from the point of view of the financing of those tasks. 

Second,  it  should  be  assessed  whether  without  new  financial  resources  the  performance  of  the 

new  task  is  disproportionate  to  the  financial  or  organisational  capacity  of  the  NCB  and  may 

negatively impact on its capacity to properly perform existing central banking tasks. 

Third,  it  should  be  assessed  whether  the  performance  of  the  new  task  does  not  fit  into  the 

institutional  set-up  of  the  NCB  in  the  light  of  central  bank  independence  and  accountability 

considerations. 

Fourth,  it  should  be  assessed  whether  the  performance  of  the  new  task  harbours  substantial 

financial risks. 

Fifth, it should be assessed whether the performance of the new task exposes the members of the 

NCB’s decision-making bodies to political risks which are disproportionate and may also impact on 

their  personal  independence  and,  in  particular,  the  guarantee  of  the  term  of  office  under 

Article 14.2 of the Statute of the European System of Central Banks and of the European Central 

Bank. 

2.2.3  Any  final  assessment  on  the  qualification  of  a  task  given  to  an  NCB  as  either  falling  within  the 

scope of a central banking task or a government task will be guided by the objective of ensuring the 

consistent application of the prohibition of monetary financing within the Eurosystem and the ESCB 

to the extent that it applies to its members. 

3. 

Specific observations 

3.1  Conferral on the CBC of the task of supervising financial leasing companies 

The draft law designates the CBC as a supervisory authority for financial leasing companies thus 

broadening  its  current  functions  and  activities.  In  the  light  of  the  guidance  set  out  in 

paragraphs 2.2.1  to  2.2.3,  it  must  be  assessed  whether  the  CBC’s  new  tasks  could  constitute  a 

breach of the monetary financing prohibition. 

3.1.1  Principle of financial independence  

The  principle  of  financial  independence  requires  NCBs  to  have  sufficient  means  to  carry  out  not 

only their ESCB-related tasks from an operational and financial point of view, but also their national 
tasks10.  In  this  regard  the  ECB  notes  that  the  draft  law  provides  that  the  CBC  has  the  power  to 
require that financial leasing companies pay to the CBC all costs related to their supervision 11. The 

10  
11  

See the ECB’s 2014 Convergence Report, p. 25. 
See Article 11(5) of the draft law. In accordance with Article 6(2)(d) of the Central Bank of Cyprus Laws of 2002 to 
2007, the CBC exercises supervision of banks. Banks are allowed to provide financial leasing services by virtue of 
item 3 in Annex IV of the Business of Credit Institutions Laws of 1997 to 2015.  

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new  tasks  assigned  to  the  CBC  would  not  affect  the  resources  the  CBC  allocates  to  the 

performance of its monetary policy tasks.  

3.1.2  Links to tasks listed in Article 127(5) of the Treaty  

Supervision over financial leasing companies can be considered a task related to those referred to 

in  Article  127(5)  of  the  Treaty,  based  on  the  understanding  that  it  is  complementary  to  the 

supervisory  tasks  exercised  by  the  NCB,  particularly  where,  as  in  this  case,  the  CBC  already 
carries out supervision of credit institutions, including their financial leasing activities12, and has the 
task of ensuring the stability of the financial system 13. Financial leasing is an instrument which has 

significantly  gained  in  importance  in  the  Union  as  an  alternative  to  classical  credit  financing  for 

consumers, small and medium-sized enterprises (SMEs) and large companies, as it also provides 

for  the  acquisition  of  property  through  the  payment  of  instalments.  Although  not  required  under 
Directive  2013/36/EU 14,  several  EEA  Member  States  have  established  a  legal  framework  for  the 
supervision  of  financial  leasing  companies  on  a  solo  basis 15  while  others  have  introduced  a 
registration  requirement16.  It  is  understood  that  these  Member  States  have  legislated  in  this  area 

based  on  the  assumption  that  the  improper  functioning  of  the  financial  leasing  business  as  a 

consequence of poor management may lead to severe damage not only for customers, but for the 

economy as a whole. In view of these developments, point 3 of Annex 1 of Directive 2013/36/EU 

lists financial leasing as an activity that is subject to mutual recognition. Financial leasing activities 

may  thus  be  carried  out  cross-border  by  credit  institutions  authorised  and  supervised  by  the 

competent  authorities  of  another  Member  State,  provided  that  such  activities  are  covered  by  the 

relevant authorisation of the credit institution.  

3.1.3  Atypical tasks 

A  number  of  Member  States  have  conferred  on  their  NCBs  supervisory  tasks  related  to  the 

provision  of  financial  leasing  services  and  financial  leasing  companies.  The  ECB  has  generally 

accepted the allocation of such tasks to NCBs provided they do not interfere with the performance 
of the NCB’s ESCB-related tasks17. The tasks of an NCB with regard to the supervision of financial 

leasing  companies  can  therefore  be  regarded  as  being  tasks  not  atypical  of  a  central  bank, 

particularly if, as in the case of the CBC, it has a statutory responsibility for bank supervision and 
financial  stability18.  Moreover,  the  complementarity  between  the  supervisory  tasks  already 

discharged by the CBC and the new task of supervising financial leasing companies is reflected in 

12  

13  
14  

15  

16  
17  

18  

In  accordance  with  Article  6(2)(d)  of  the  Central  Bank  of  Cyprus  Laws  of  2002  to  2007,  the  CBC  exercises 
supervision of banks. Banks are allowed to provide financial leasing services by virtue of item 3 in Annex IV of the 
Business of Credit Institutions Laws of 1997 to 2015. 
Article 6(2) (e) of the Central Bank of Cyprus Laws of 2002 to 2007.  

institutions  and 

the  prudential  supervision  of  credit 

Directive  2013/36/EU  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on  access  to  the  activity  of 
credit 
firms,  amending 
Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338). 
These  include  Portugal,  Spain,  Iceland,  Germany,  Italy,  Greece,  Liechtenstein,  France,  Romania,  Bulgaria  and 
Malta. 
These include Belgium, the Czech Republic, Estonia, Lithuania, Luxembourg and Sweden. 
See Opinion CON/2009/57. 

institutions  and 

investment 

See Article 6(2)(d) and (e) of the Central Bank of Cyprus Laws of 2002 to 2007.  

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the  common  system  of  financing  of  the  CBC’s  supervisory  tasks  via  contributions  from  the 
supervised entities19. 

3.1.4  Discharge of tasks on behalf of and in the exclusive interest of the Government or of other public 

entities 

The CBC is designated as the sole supervisory authority for companies providing financial leasing 

services  in  its  own  name  and  not  on  behalf  of  any  other  authority.  There  is  no  indication  that  in 

discharging  its  supervisory  function  the  CBC  acts  exclusively  in  the  interests  of  another  public 

entity. 

3.1.5  Extent to which conflicts of interests with existing CBC tasks are addressed and the performance of 

tasks  fits  into  the  CBC’s  institutional  set-up  in  the  light  of  central  bank  independence  and 

accountability considerations 

The  conferral  of  these  tasks  on  the  CBC  does  not,  prima  facie,  raise  any  issues  of  conflict  of 

interest. The performance of these tasks fits smoothly into the CBC’s institutional set-up, and does 

not raise any issues arising out of central bank independence and accountability considerations. 

3.1.6  Extent  to  which  the  performance  of  tasks  is  proportionate  to  the  CBC’s  financial  and  operational 

capacity and its ability to perform its ESCB-related tasks 

As  noted  above,  in  order  to  remain  financially  independent,  NCBs  must  have  sufficient  means  to 

carry out not only their ESCB-related tasks from an operational and financial point of view, but also 

their national tasks. In this regard the ECB  welcomes the fact that the draft law  provides that the 

CBC’s costs for supervision of financial leasing companies will be coved by the industry.   

3.1.7  Extent to which the performance of tasks harbours substantial financial risks  

The  draft  law  contains  provisions  excluding  or  limiting  the  liability  of  the  CBC  as  the  authority 

responsible  for  the  supervision  of  financial  leasing  companies  for  any  act  or  omission  or  other 

breach  of  any  legal  obligation  when  exercising  supervisory  powers  except  if  such  an  act  or 

omission was not done in good faith or is the result of negligence. In contrast, the liability regime for 

the  CBC  when  conducting  its  supervisory  powers  over  credit  institutions  is  excluded,  unless  it  is 
shown that the act or omission was not done in good faith or was the result of gross negligence 20. 

The ECB considers that it would be useful to  align the CBC’s liability under the draft law with the 

liability regime for the CBC when conducting its supervisory powers over credit institutions, given 

that potential liability issues could represent financial risks for the CBC. 

3.1.8  Conclusion 

The  ECB  considers  that  there  are  grounds  for  regarding  the  CBC’s  task  of  supervising  financial 

leasing companies as a central banking task in the sense that it complements the CBC’s existing 

bank supervisory functions. The fact that the performance of the new supervisory function  will be 

19  

20  

See Section 26(3) of the Business of Credit Institutions Laws of 1997 to 2015, which similarly empowers the CBC to 
require credit institutions to pay to it all the fees, related to their supervision and inspection in accordance with CBC 
directives.  
Article 32(1) of the Business of Credit Institutions Laws of 1997 to 2015. See also Principle 2 of the ‘Core Principles 
for Effective Banking Supervision’ setting out that the supervisor and its staff should be protected against lawsuits for 
actions taken and/or omissions made while discharging their duties in good faith. 

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financed  by  supervised  entities  has  a  positive  impact  on  the  CBC’s  financial  capacity  to  assume 

those tasks. However, the ECB considers that the draft law potentially creates financial risks for the 

CBC because it does not limit the CBC’s liability, as a public authority, for damages caused in the 

course  of  the  exercise  of  its  new  supervisory  powers,  in  similar  terms  to  the  CBC’s  liability  in 

connection with its bank supervisory tasks. It would be useful to align the CBC’s liability under the 

draft law  with the liability regime for the CBC  when conducting  its supervisory powers over credit 

institutions.  

3.2  Concerns over level playing field issues and opportunities for regulatory arbitrage  

The  ECB  welcomes  the  extension  of  the  supervisory  scope  of  national  competent  authorities  to 

non-credit  institutions  providing  services  similar  or  equivalent  to  those  provided  by  supervised 

credit institutions for level playing field reasons and to avoid regulatory arbitrage. 

The ECB acknowledges that financial leasing companies are subject to minimum capital and other 

regulatory  requirements.  The  ECB  understands  that  the  Cypriot  authorities  opted  not  to  impose 

explicit limits on leverage and liquidity requirements at this stage so as to offer wider opportunities 

for  financing  to  new  leasing  companies,  with  a  view  to  facilitating  private  debt  restructuring,  as 

mentioned  in paragraph 2.1.  Nevertheless, the ECB  considers that  it  would be  useful to  explicitly 

clarify  limits  on  leverage  and  liquidity  requirements  for  these  new  entities  at  some  stage,  and 

particularly  in  the  event  of  the  emergence  of  risks  relating  to  regulatory  arbitrage  or  of  concerns 

about financial stability.  

3.3  Ancillary services 

The  ancillary  services  to  leasing  activities  covered  in  the  draft  law  appear  quite  broad.  The  ECB 

considers that ancillary services should be carefully considered, in order to guarantee the financial 

nature  of  the  entities  authorised  to  perform  leasing  activities.  In  this  sense,  typical  real  estate 

services should be outsourced.  

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 19 October 2015. 

[signed] 

The President of the ECB 

Mario DRAGHI 

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