ECB expresses doubts over Irish draft law on consumer credit

The European Central Bank has raised a number of questions over a draft Irish law that would expand the central bank’s oversight of consumer credit.

Ireland’s government requested an ECB opinion on June 8 on its proposed law on “consumer protection (regulation of credit servicing firms)”. The ECB says the law aims to regulate “the owners of credit agreements entered into with natural persons and with micro, small or medium-sized enterprises”.

The draft law aims at “extending existing provisions of Irish law” and, in particular, the 1997 law that governs the central bank, to owners of credit agreements.

Under the law, these owners would be required to hold a licence from the Central Bank of Ireland, which is not currently the case.

The CBI would also be able to stipulate that credit agreement owners could not take actions that break Irish financial services law. It would gain the power to require credit agreement owners to take out professional indemnity insurance.

Under the draft law, debt management firms and credit servicing firms, as well as credit agreement owners, would be subject to the central bank’s existing consumer protection code and its code of conduct on mortgage arrears. Among other provisions, any business that is currently permitted to act as a financial services firm in Ireland would be able to take on the role of a credit agreement owner.

In an official opinion, the ECB says that the law “may raise issues of legal certainty”, arguing it is “unclear” how the law’s amendments interact with existing financial law and, in particular, the central bank’s current powers.

“In particular, it is unclear what the relationship will be between the draft law and the existing rules applicable to credit servicing firms,” the ECB says. These are firms that manage credit agreements and directly interact with borrowers 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,” the opinion argues.

The ECB’s opinion also notes that the law could help create a secondary market for non-performing loans accrued by the “credit agreement owner” sector. But it notes that a market for NPLs needs to be accompanied by “risk reduction measures”. These are especially important, it says, where NPL stocks are high.

Furthermore, the ECB says that the Irish government intends that the draft law’s provisions would not apply to securitisation markets, but says this intention “is not fully clear from the current text”.