The Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021
What does it mean for BNPL, HP, PCP and credit servicing firms?Introduction
“Buy now pay later” (BNPL) products are gaining increasing popularity in Ireland in the form of catalogue credit, store cards or offered as a payment option at the point of sale (this can be in-store or online). With the increasing prevalence of digital lending and online shopping, it has become ever more common for online retailers to offer BNPL as a payment option during checkout on their websites.
However, similar to providers of personal contract plans (PCP), consumer hire and hire purchase, BNPL providers are not currently regulated by the Central Bank of Ireland (CBI) as “retail credit firms”, as they do not offer cash loans “directly” to individuals. While these types of credit products may be subject to the Consumer Credit Act (CCA), the European Communities (Consumer Credit Agreements) Regulations 2010 and the Credit Reporting Act 2013, they have not to date required authorisation by the CBI and so are not subject to the CBI’s Consumer Protection Code 2012. This has given rise to concerns about the potential consumer protection implications due to the lack of suitability and affordability checks before offering consumers such deferred payment options.
Against this backdrop, the Tutty Report was commissioned and published in November 2018, putting forward a number of recommendations to improve the level of consumer protection in relation to the provision of PCP and hire purchase agreements. The Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 (Bill) was introduced in September 2021 to extend the CBI’s authorisation requirements to any person or firm which provides credit (including indirectly), hire purchase, PCPs and consumer hire agreements. The Bill has implemented most of the recommendations from the Tutty Report, and went even further to propose regulation of the indirect provision of credit, capturing circumstances where the lender provides credit to the borrower by paying a retailer for the purchase of a good. This means that that BNPL providers will soon require authorisation by the CBI as “retail credit firms”, a move which is consistent with the UK Financial Conduct Authority’s approach.
What does this mean for businesses?
The Bill will increase the regulatory burden for firms in the BNPL, PCP and HP lending industries. Currently unregulated consumer lenders should assess whether their activities fall within the new definitions of Retail Credit Firm (RCF) or Credit Servicing Firm (CSF) (as elaborated below) and determine whether they should:
- apply for CBI authorisation as a RCF or CSF; or
- restructure their activities so that an authorised entity can carry out the relevant activities on their behalf.
Authorisation
- Retail Credit Firm (RCF)
- CBI’s Requirements for RCFs which impose certain restrictions and/or requirements regarding outsourcing, record keeping, credit policy and monitoring etc.
- CBI’s Consumer Protection Code 2012 which includes requirements 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 credit agreement.
- CBI’s Minimum Competency Code (MCC) and Fitness & Probity Standards which require senior management to be approved by the CBI and staff selling credit to consumers will need to have adequate qualifications etc.
- The Financial Services and Pensions Ombudsman Act 2017 and the Central Bank (Supervision and Enforcement) Act 2013 will apply, including the dispute resolution and enforcement provisions.
- Credit Servicing Firm (CSF)
The definition of “credit” has been expanded beyond the provision of cash loans. Credit now includes a deferred payment, cash loans, and other similar financial accommodation (i.e. credit and the letting of goods). An entity will be required to hold a RCF licence if it (1) directly or indirectly provides credit to; or (2) enters into a consumer-hire or hire purchase agreement with a relevant person (i.e. a natural person that is not a MiFID professional client).
All firms seeking authorisation as a RCF will be required to demonstrate to the CBI that they are in a position to meet each of the Authorisation Requirements and Standards for RCFs. Details and guidance in relation to the authorisation process can be found here.
Once authorised, the firms will be subject to a range of new requirements, including:
As discussed above, the definition of credit will be expanded upon to include deferred payments and other similar financial accommodation (in addition to cash loans). As a result of the broader definition of “credit” this will require entities carrying out services in respect of those assets, which include inter alia the management or administration of the relevant credit agreement or the legal title holder of such assets to be authorised by the CBI. Further the Bill, has also extended the definition of credit servicing to hire-purchase agreements and consumer-hire agreements.
All firms seeking authorisation as a CSF will be required to demonstrate to the CBI that they are in a position to meet each of the Authorisation Requirements and Standards for CSF prior to an authorisation being granted. Details and guidance in relation to the authorisation process can be found here.
Once authorised, the firms will be subject to a range of new requirements, including:
- maintaining professional indemnity insurance against liability arising from professional negligence;
- establishing a robust set of arrangements for governance including, amongst other things, sound administrative and accounting procedures;
- maintaining sufficient compliance arrangements to ensure that it complies with all relevant financial services legislation and regulatory requirements to which it is subject;
- developing an audit function to provide independent internal oversight of the CSF’s activities including risk management, internal controls and governance processes;
- ensuring appropriate accounting policies are in place which enable it to promptly provide financial reports which reflect a true and fair view of its financial position to the CBI;
- demonstrating how its IT systems are capable of meeting any relevant obligations under financial services legislation, including compliance with any applicable codes of conduct;
- notifying the CBI in respect of any proposed material change of ownership of the Credit Servicing Firm; and
- maintaining records of compliance reports, customer records, mortgage deeds and copies of loan agreements.
Transitional Authorisation
The Bill provides for transitional periods for firms engaging in the relevant activities (e.g. the direct or indirect provision of credit, entering into consumer-hire or hire purchase agreements with the relevant persons, or carrying out credit servicing activities for any in-scope agreements) prior to the coming into force of the Bill. Such firms will be deemed to be authorised in relation to the expanded scope of “regulated business” until the CBI has granted or refused authorisation to the person. The transitional period will only apply to firms who apply to the CBI to be authorised as a RCF or CSF no later than 3 months after the coming into operation of the relevant provisions of the Bill.
23% APR Cap
Annual percentage rates (APR) of interest on credit agreements (other than money-lending agreement) and hire-purchase agreements with consumers will be capped at 23%. If this cap is breached, the agreement will not be enforceable unless a court is satisfied that the omission was not deliberate and has not prejudiced the consumer. Breaching the APR cap will also be an offence punishable by a fine of up to EUR100,000 and 5 years imprisonment or both.
Timing
The Bill is one of the Irish Government’s legislative priorities and is expected to be passed by the end of this year. The Government is not expected to publish its proposals to implement the new EU Credit Servicing Directive (as discussed in our previous article) before the Bill is enacted into law. Accordingly, it is likely that further amendments to the Central Bank Act 1997 will be required on foot of the implementation of this Directive.
Conclusion
Affected firms will require a significant amount of time and effort to prepare for and implement the increased regulatory burden arising from the Bill.
Snapshot of the Key Changes:
| Definition | Current Legislation :
| Proposed Legislation: Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Bill 2021 |
| Credit | “Credit” means a cash loan (whether or not provided on the security of a mortgage or charge over an estate or interest in land); “Credit” is limited to a cash loan (whether or not provided on the security of a mortgage or charge over an estate or interest in land). | The definition of “Credit” has been (a) a deferred payment, (b) a cash loan (whether or not provided on the security of a mortgage or charge over an estate or interest in land), or (c) other similar financial accommodation.”2 |
| Exemptions to Credit | “Credit” does not include credit of a class specified in section 3(2) of the 1995 Act, including, inter alia: i. credit originated and held by credit unions; ii. credit provided without interest or charge; iii. an agreement for the provision of a service on a continuing basis where the consumer can pay for it by instalments or deferred payments). | Exemptions to “Credit” have been expanded to include: i. bailment of goods to a hirer under an agreement of less than 3 months’ duration under which the property in the goods remains with the owner in addition to the existing exemptions relating to section 3(2) of the 1995 Act. |
| Retail Credit Firm | “Retail Credit firm” includes a person whose business consists wholly or partly of providing credit directly to the relevant persons. | The definition of “Retail Credit Firm” has been expanded to include the provision of the following “Relevant Activity”, which includes: i. directly or indirectly providing credit to; orii. entering into consumer-hire or hire-purchase agreements with, a relevant person (being a natural person). |
| Exemptions to Retail Credit Firm | “Retail Credit Firm” does not include, inter alia: i. a person who is already a regulated financial service provider authorised to provide credit, ii. a person who is an authorised credit intermediary, iii. a person to whom all or any part of that other person’s interest in the credit is directly or indirectly assigned or otherwise disposed of, iv. a person who provides credit on a once only, or occasional basis and in so doing, does not create an impression that the person would enter into agreements with other persons on the same or similar terms, v. an exempted person; | Exemptions to “Retail Credit Firm ” have been expanded to include — i. a consumer-hire agreement or a hire- purchase agreement that was entered into by another person, a person to whom that other person’s interest in the agreement concerned is directly or indirectly assigned or disposed of, ii. a person whose business consists partly of a relevant activity, but only by virtue of the person providing credit in the form of trade credit, or iii. a local authority in addition to the existing exemptions set out in the 1995 Act (as summarised in the left hand column). |
| Credit Servicing | “Credit Servicing” includes carrying out the following activities, inter alia: i. holding the legal title to the credit agreement; ii. managing or administering the credit agreement (e.g. notifying interest rate changes, collecting payments, handling complaints, determining the overall strategy for the management and administration of a portfolio of such agreements, maintaining control over key decisions relating to such portfolio; or iii. communicating with the customer in relation to the above (other than holding legal title). | “Credit Servicing”:
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1See here
2The term “financial accommodation” is defined by reference to the CCA 1995 to include “credit and the letting of goods”.
