Opinion of the European Central Bank of 5 July 2018 on the regulation of the business of owning credit agreements (CON/2018/31)
Date: 2018-07-05
Institutions: European Central Bank
Subjects: Ireland, banking supervision, consumer credit, consumer protection, credit institution, financial stability, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 5 July 2018  

on the regulation of the business of owning credit agreements  

(CON/2018/31) 

Introduction and legal basis 

On  8  June  2018  the  European  Central  Bank  (ECB)  received  a  request  from  the  Chairman  of  the 

Oireachtas  (the  Irish  National  Parliament)  Joint  Committee  on  Finance,  Public  Expenditure  and  Reform 

and Taoiseach (the Irish Prime Minister), for an opinion on the Consumer Protection (Regulation of Credit 

Servicing Firms (Amendment)) Bill (hereinafter the ‘draft law’). 

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  Ireland  (CBI),  rules  applicable  to  financial 

institutions  insofar  as  they  materially  influence  the  stability  of  financial  institutions  and  markets  and  the 

tasks  conferred  upon  the  ECB  concerning  the  prudential  supervision  of  credit  institutions  pursuant  to 

Articles  127(6)  of  the  Treaty.  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 draft law intends to regulate the owners of credit agreements entered into with natural persons 

and with micro, small or medium-sized enterprises. For that purpose, the draft law aims to extend 

the requirements introduced by the Consumer Protection (Regulation of Credit Servicing Firms) Act 

2015  (hereinafter  ‘the  2015  Act’)  to  ‘credit  agreement  owners’.  The  draft  law  defines  ‘credit 

agreement  owners’  as  persons  who  –  in  respect  of  a  credit  agreement  or  portfolio  of  credit 

agreements  –  hold  legal  title  to  the  credit,  determine  the  overall  strategy  for  management  and 

administration of the credit, determine the interest rate, maintain control over key decisions, or take 

such steps as may be necessary for the purpose of enabling the undertaking of credit servicing by 

another person or enforcing a credit agreement. 

1.2  The draft law seeks to regulate credit  agreement owners by extending  existing  provisions of Irish 

law to these entities, in particular the Central Bank Act 1997, which regulates the activities of retail 

credit  firms  and  credit  servicing  firms.  First,  the  draft  law  amends  the  definition  of  a  ‘regulated 
business’ to also include credit agreement owners2. This means that credit agreement owners are 

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 section 2 of the draft law. See also Part V (Supervision of Regulated Businesses) of the Central Bank Act 1997, 
as amended.  

 
 
 
 
                                                 
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required  to  hold  an  authorisation  issued  by  the  CBI.  The  CBI  may  also  impose  a  condition  or 
requirement for a credit agreement owner to effect a policy of professional indemnity insurance3. In 

addition, the draft law provides that a credit agreement owner is prohibited from taking or failing to 

take  an  action,  if  this  would  otherwise  be  a  contravention  of  Irish  legislation  or  Irish  statutory 

instruments,  of  CBI  codes  or  directions,  or  of  conditions,  requirements  or  obligations  imposed  by 
the CBI in accordance with those acts 4.  

1.3  Second,  the  draft  law  explicitly  sets  out  that  the  CBI  may  impose  requirements  on  debt 

management firms, credit servicing firms, and credit agreement owners to be subject to the CBI’s 
Code of Conduct on Mortgage Arrears 2013 (CCMA), and the Consumer Protection Code (CPC)5. 

The  CBI  is  also  empowered  to  require  such  entities  to  provide  certain  information  to  customers, 

within 30 days of their credit agreement being sold, including information on the terms on which the 

credit agreement was sold, any material change to the terms under which the credit agreement is 

serviced (including the interest rate), whether the loan was sold at a discount, and details of their 

rights  under  the  CCMA  and  in  respect  of  the  Financial  Services  and  Pensions  Ombudsman 

(FSPO). 

1.4  Third,  similar  to  the  2015  Act,  the  draft  law  amends  the  definition  of  ‘customer’6  to  include  a 

relevant  borrower  in  a  case  where  a  regulated  financial  service  provider  undertakes  the  role  of 

credit  agreement  owner.  The  draft  law  also  amends  the  definition  of  ‘relevant  default’  by  a 

regulated  financial  service  provider  to  include  the  actions  of  a  credit  agreement  owner,  such  as: 

taking  steps  to  cause  a  breach  of  the  terms  of  a  credit  agreement;  enforcing  security  when  the 

customer is not in financial difficulties; and altering the fixed duration of a credit agreement without 
the consumer’s written consent7. These changes aim to ensure that the CBI’s existing supervision 

and enforcement powers in relation to protecting customers are extended to relevant borrowers in 

their  interactions  with  credit  agreement  owners.  In  this  respect,  the  draft  law  also  clarifies  the 

respective roles of the CBI and the FSPO. 

1.5  Fourth,  similarly  to  the  2015  Act,  the  draft  law  extends  the  provisions  regarding  the  FSPO, 

including  the  complaints  mechanism,  to  consumers  and  any  person  engaging  with  a  credit 
agreement owner8. 

1.6  Fifth, the draft law obliges the CBI to publish statistics on a quarterly basis, on loans held by micro, 

small or medium-sized enterprises, including  information on the number and values of loans held 

by  such  enterprises,  the  total  number  of  loans  of  such  enterprises  held  by  credit  agreement 

owners,  the  total  number  of  loans  in  arrears,  and  the  total  number  of  loans  held  by  credit 

agreement owners that have been restructured. 

1.7  Finally,  the  draft  law  provides  that  a  regulated  financial  service  provider,  which  is  authorised  to 

provide credit in the Republic of Ireland, is deemed to be authorised to carry on the business of a 

3  
4  
5  
6  
7  
8  

See section 4 of the draft law. 
See section 9 of the draft law. 

See section 8 of the draft law. 
See section 6 of the draft law. 
See section 10 of the draft law. 
See sections 7 and 11 of the draft law. 

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credit  agreement  owner 9.  Moreover,  the  draft  law  includes  transitional  provisions  applicable  to 
existing  credit  agreement  owners  that  are  not  yet  regulated  financial  service  providers 10.  These 

provisions  set  out  that  credit  agreement  owners  can  be  taken  to  be  authorised  to  carry  on  the 

business  of  a  credit  agreement  owner  until  the  CBI  has  granted  or  refused  authorisation,  on 

condition that an application for authorisation has been submitted by that credit agreement owner. 

During  the  transitional  period,  the  CBI  may:  impose  conditions  or  requirements  relating  to  the 

proper and  orderly regulation and supervision of credit agreements; direct that the person should 

not  carry  on  the  business  of  credit  agreement  owner  for  a  period;  or  direct  that  a  purchaser  of  a 

credit agreement will be subject to the provisions of the Act, except where such purchase is made 

by  way  of  securitisation.  Moreover,  the  transitional  provisions  prescribe  that  a  credit  agreement 

owner  that  possesses  a  portfolio  of  credit  agreements  within  the  same  competing  commercial 

sector, or is involved in the management and administration of a commercial enterprise in the same 

sector, may not instruct a credit servicing firm to take action in such a manner as to jeopardise the 

interests of customers to benefit these competing interests. The CBI  is empowered to investigate 

complaints  into  such  competing  interests.  The  draft  law  also  amends  the  transitional  provisions 

applicable to existing retail credit firms and credit servicing firms, by empowering the CBI to direct 

that  a  purchaser  of  a  credit  agreement  is  subject  to  the  provisions  regarding  regulated  business, 
except where such purchase is made by way of securitisation11.  

2. 

Observations 

2.1  Tasks of the CBI 

The  draft  law  complements  the  CBI’s  existing  tasks,  in  particular  in  the  field  of  supervision  of 

regulated  financial  service  providers  and  regulated  businesses,  However,  it  does  not  confer 

genuinely new tasks on the CBI in this area. For example, in respect of retail credit firms and credit 

servicing firms, the CBI already has powers to authorise and supervise such entities, to make them 

subject to CBI codes or directions, and to take enforcement measures against them, including for 

the purposes of protecting natural persons and micro, small or medium-sized enterprises that have 
entered  into  credit  agreements12.  Moreover,  the  CBI  also  already  has  the  function  to  collect 
statistics  in  the  field  of  micro,  small,  and  medium-sized  enterprises 13.  Consequently,  the  issue  of 

assessing  the  conferral  of  new  tasks  on  a  national  central  bank  from  the  perspective  of  the 
prohibition of monetary financing does not arise14. 

2.2 

Impact on secondary markets for credit institution assets 

2.2.1  The ECB has been a strong proponent of the development of secondary markets for bank assets, 

particularly  non-performing  loans  (NPLs),  as  reflected  in  the  EU  Council’s  action  plan  to  tackle 

9   
10  
11  
12   
13   
14   

See section 3 of the draft law. 

See section 5 of the draft law. 
See section 9 of the draft law. 

See sections 28 to 36N of the Central Bank Act 1997, as amended. 
Section 5A(1)(g) of the Central Bank Act 1942. 
See  paragraph  3.1  of  Opinion  CON/2018/27.  All  ECB  opinions  are  published  on  the  ECB’s  website  at 
www.ecb.europa.eu. 

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NPLs in Europe15. In the context of the large stocks of NPLs that remain on the balance sheet of 
some European credit institutions, and as part of a comprehensive solution to NPL resolution16, the 

development  of  secondary  markets  may  contribute  to  reducing  NPLs.  Looking  ahead,  well-

functioning secondary markets may also prevent stocks of NPLs building-up in the future. 

2.2.2  Moreover,  a  well-functioning  secondary  market may  have  a  positive  effect  on  financial  stability  to 

the  extent  that  it  could  facilitate  the  transfer  of  the  risks  of  NPLs  off  credit  institutions’  balance 

sheets. The presence of significant volumes of NPLs on credit institutions’ balance sheets reduces 

their  ability  to  fulfil  their  function  as  providers  of  credit  to  the  real  economy  and  hampers  the 

operational flexibility and overall profitability that are essential to a well-functioning banking sector. 

It  is  essential  that  the  legal  framework  applicable  to  secondary  markets  enables  the  efficient 

transfer of NPLs off the balance sheet of credit institutions. 

2.2.3  In  this  context,  the  draft  law  must  carefully  balance  the  benefits  of  creating  well-functioning 

secondary  markets  against  the  impetus  to  protect  debtors.  Provisions  within  the  draft  law  may 

create a burden of costs for investors, which could impede their participation in secondary markets, 

thereby  reducing  overall  participation  and  reducing  price  competition  in  the  market  place.  Even  if 

the  provisions  of  the  draft  law  do  not  result  in  reduced  participation  by  investors,  investors  may 

simply  pass the costs associated  with meeting these  provisions onto the credit institutions selling 

the assets. As such, risks to financial stability may emerge either as a result of a failure to develop 

secondary markets or because prices in those markets are subdued by regulatory costs. 

2.2.4  While  risk  transfer  through  asset  sales,  securitisation  and  other  measures  may  be  effective  in 

reducing NPLs, risk reduction measures remain, nevertheless, an important channel, particularly in 

a  context  where  NPL  stocks  are  high.  In  that  regard,  and  in  the  context  of  a  comprehensive 

solution  to  NPL  resolution,  the  originating  credit  institutions’  internal  procedures  for  handling  the 

work-out of NPLs themselves will always remain important. 

2.3 

Impact on securitisation 

2.3.1  The ECB has a strong interest in the sustainable revival of the European securitisation market. As 

a  form  of  asset-based  financing  with  the  capacity  both  to  channel  flows  of  credit  to  the  real 

economy  and  to  transfer  risk,  securitisation  has  particular  significance  for  the  transmission  of 

monetary policy.  A  healthy European securitisation market is important  to ensure  well-functioning 

capital  markets  in  the  Union.  Particularly  where  credit  institutions’  capacity  to  lend  to  the  real 

economy is constrained, securitisation can act as a fresh source of funding and free up capital for 
lending17. Securitisation may also have a positive effect on financial stability to the extent that it can 

facilitate the transfer of the risks of NPLs off credit institutions’ balance sheets. Securitisation is one 

of a variety of options that banks may apply alone or in combination with other measures, such as 
borrower-creditor engagement, to address the issues posed by NPLs 18.  

15  

16  

17  
18  

loans 

See  the  EU  Council’s  press  release  of  11  July  2017  on  the  ‘Council  conclusions  on  Action  plan  to  tackle  non-
performing 
available 
in 
http://www.consilium.europa.eu/en/press/press-
releases/2017/07/11/conclusions-non-performing-loans/. 
See, 
https://www.ecb.europa.eu/pub/pdf/other/sfbfinancialstabilityreview201611.en.pdf. 
See paragraph 3.1.1 of Opinion CON/2018/16. 

the  ECB’s  November  2016  Financial  Stability  Review,  available  at: 

for  example,  Section  B  of 

Europe’, 

at: 

See paragraph 3.1.2 of Opinion CON/2018/16. 

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2.3.2  The ECB understands that the draft law intends to exempt securitisation from the scope of the draft 

law.  The  ECB  welcomes  this  intention,  as  this  will  ensure  that  the  draft  law  does  not  discourage 

securitisation  activity.  However,  this  exemption  is  not  fully  clear  from  the  current  text  of  the  draft 
law19. Therefore, it is suggested that the drafting be further reviewed, in order to  ensure full legal 

certainty in this respect. 

2.4 

Interaction with existing Irish statutory provisions and prospective Union legislative measures 

2.4.1  The ECB recalls that the 2015  Act set out that credit  servicing firms would  be regulated financial 

services providers and thus subject to the authorisation and supervision of the CBI, including, inter 

alia, the application of the CCMA and the CPC. The ECB was consulted on the draft 2015 Act, and 

welcomed  the  measures,  which  aimed,  inter  alia,  to  contribute  to  preserving  confidence  in  the 
marketplace20. In that respect, the ECB welcomes the intention of the draft law.  

2.4.2  However, the current text of the draft law may raise issues of legal certainty. The draft law amends 

a number of existing provisions of Irish law. In some cases, it is  unclear how these amendments 

interact  with  the  existing  provisions,  and  with  the  existing  powers  of  the  CBI.  In  particular,  it  is 

unclear what the relationship will be between the draft law and the existing rules applicable to credit 

servicing  firms.  Credit  servicing  firms  are  responsible  for  managing  or  administering  credit 

agreements  and  interacting  directly  with  the  relevant  borrower  on  behalf  of  credit  agreement 

owners.  The  application  of  identical  provisions  to  credit  servicing  firms  and  credit  agreement 

owners  could  result  in  uncertainty  as  regards  the  responsibility  and  liability  of  the  respective 

entities.  In  this  respect  it  is  worth  noting  that  under  the  2015  Act,  persons  who  hold  legal  title  to 

credit  are  already  directly  subject  to  the  rules  applicable  to  credit  servicing  firms,  if  they  do  not 
engage an authorised credit servicing firm to carry out credit servicing21. Moreover, it is a criminal 

offence for persons holding legal title to credit to take action, or fail to take action, which would lead 
to a contravention of the applicable rules 22. 

2.4.3  To  the  extent  that  the  draft  law  aims  to  address  elements  of  credit  agreement  ownership  and 

servicing that are not currently subject to regulation, and that go beyond the protections already in 

place in respect of credit servicing firms, the impact of the draft law, and the role of the CBI, are not 

clear. These new elements include the credit agreement owners’ capacity to determine the overall 

strategy  for  the  management  and  administration  of  credit  agreements,  to  determine  the  interest 

rate, or to maintain control over key decisions. The CBI does not currently regulate these activities 

in relation to regulated lenders, namely credit institutions and retail credit firms, and, in this context, 

caution  should  be  exercised  when  purporting  to  regulate  commercial  decisions  of  market  actors. 

Such administrative control should only be undertaken where it is clear what purpose the controls 
seek  to  achieve  and  that  they  are  likely  to  achieve  this  purpose 23.Otherwise,  the  introduction  of 

such  measures  could  lead  to  unintended  side  effects.  If  the  Irish  market  for  investment  in  credit 

19  

20   
21   
22   
23  

The definition of ‘credit agreement owner’ in section 2 of the draft law refers to persons who hold title to a portfolio of 
credit  agreements.  This  would  appear  to  include  persons  who  hold  such  title  by  way  of  securitisation.  However, 
sections 5 and 9 of the draft law include provisions that refer to purchasers of credit agreements being subject to the 
provisions of the draft law ‘except where such purchase is made by way of securitisation’. 
See paragraph 2 of Opinion CON/2014/69.  
See the definition of ‘credit servicing firm’ under section 28 of the Central Bank Act 1997, as amended. 
See section 34G of the Central Bank Act 1997, as amended. 
See paragraphs 3.1, 3.1.2 and 3.1.4 of Opinion CON/2016/54. 

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agreements  is  rendered  significantly  less  attractive  in  general,  this  could  limit  the  ability  of  Irish 

credit  institutions  to  diversify  their  sources  of  finance  for  any  type  of  credit  agreement,  not  just 

those  in  arrears  or  which  are  non-performing.  This  could  in  turn  increase  pressure  on  Irish  credit 

institutions to adjust their own strategy for managing and administrating existing credit agreements 

and  determining  interest  rates,  which  might  not  ultimately  benefit  borrowers.  In  addition,  it  could 

detrimentally affect Irish credit institutions’ ability to engage in new lending and the terms on which 

they would provide new credit, also to the potential detriment of borrowers. 

2.4.4  The draft law is being introduced without the benefit of a thorough impact assessment. It is only by 

making  such  a  prior  assessment  that  it  may  be  possible  both  to  determine  whether  the  draft  law 

could  achieve  its  aims,  and  to  mitigate  any  negative  implications.  In  the  absence  of  an  impact 

assessment, however, it is difficult to ascertain whether the objectives set by  the draft law  will be 
achieved24. 

2.4.5  Finally, the ECB notes that on 3 March 2018, the Commission published its proposal for a Directive 

of  the  European  Parliament  and  of  the  Council  on  credit  servicers,  credit  purchasers  and  the 
recovery  of  collateral25.  This  proposal  seeks  to  set  out  a  common  Union  framework  and 

requirements for credit servicers, credit purchasers, and for the recovery of collateral in respect of 

credit  agreements  concluded  with  business  borrowers,  with  a  view  to  ensuring  a  high  level  of 

consumer  protection  and  a  level  playing  field  across  the  Union.  If  this  proposed  Directive  is 

adopted  by  the  European  Parliament  and  the  Council,  its  provisions  will  be  transposed  into  Irish 

law, requiring further amendment of the rules applicable to credit servicing and credit ownership.  

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

Done at Frankfurt am Main, 5 July 2018. 

[signed] 

The President of the ECB 

Mario DRAGHI 

24  

25  

See  paragraph  2.2.2  of  Opinion  CON/2018/13,  paragraph  2.3  of  Opinion  CON/2012/40,  paragraph  2.3  of  Opinion 
CON/2012/70, and paragraph 2.2 of Opinion CON/2010/34. 
COM(2018) 135 final. 

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