For credit institutions, the management and restructuring of their non-performing loans (“NPLs”) and the possibility to sell these NPLs are essential to preserve financial stability, by reducing their balance sheets in line with prudential requirements and encouraging lending activity (by promoting the emergence of a secondary market NPLs in the Union and facilitating cross-border operations).
In line with these objectives, the European Union adopted Directive (EU) 2021/2167 of 24 November 2021 on credit servicers and credit purchasers (the “Directive“). The Directive was transposed into French law through Ordinance No. 2023-1139 of 6 December 2023 (the “Ordinance“) entering into force on 30 December 2023.
The players in the NPL secondary market
The various players in the secondary market for credits (another name for loans) were not subject to specific regulatory requirements. Until now, French law had regulated these players only marginally and indirectly, through provisions applicable to the amicable debt recovery on behalf of third parties, or through the application of general principles of banking law related to the banking monopoly. However, such scattered and dispersed legal provisions remained unsuitable for actual development of the NPL secondary market in France.
The adoption of the Ordinance introduces a legal regime specific to the NPL secondary market in French law, in a new Chapter XI (in Title IV of Book V) of the French Monetary and Financial Code entitled “Credit servicers and credit purchasers”.
The players in this secondary market can be divided into three categories.
Firstly, credit purchasers i.e. any natural or legal person other than a credit institution which acquires the rights arising from an NPL or the NPL contract itself and becomes its creditor.
Secondly, credit servicers, defined as legal persons engaged in a commercial activity of managing and enforcing, on behalf of a credit purchaser, the rights and obligations linked to an NPL or the rights of a creditor under the NPL contract.
Finally, the credit servicer may, under its responsibility, outsource any credit management activity to a credit management service provider.
Because of their extensive regulation and supervision focused on systemic risk and the protection of financial services consumers, credit institutions in the European Union carrying out credit management or credit purchase activities remain outside the scope of the Directive. The Ordinance maintains this logic.
Consequently, a company acting on behalf of a credit institution that has outsourced credit management to it, is not a credit servicer within the meaning of the new regime provided by the Ordinance. In such a case, the credit institution remains responsible for the credit. The relationship is then governed by the legal provisions specific to credit institutions (through interpretation of the new Article L54-11-3, I, of the French Monetary and Financial Code).
Finally, the new regime does not extend to credit management operations issued by a credit institution not established in the European Union, or to the purchase of credit by an institution established in a Member State of the European Union. This last exclusion matches the logic of creating a coordinated European market: a European credit institution is outside the regime created by the Directive for credit servicers and purchasers.
The licensing requirement for credit servicers
Through the new regime, credit servicers must be licensed by the French Prudential Supervision and Resolution Authority (“ACPR”) to carry out their credit management activities. This license is subject to several conditions, which are indisputably common in financial matters (i.e. ISPs, digital asset service providers).
Among the new requirements, managers must be of “adequate honorability” (clean criminal record, absence of minor incidents that could tarnish their good name, etc.) and possess sufficient knowledge and experience.
Some requirements relate to the credit servicer’s internal organization. The latter must implement a robust and appropriate governance, internal control, risk management, borrower protection and AML-CFT frameworks.
Credit servicers, who were not previously subject to AML/CFT obligations, will have to adopt a specific framework to be licensed. These requirements will also apply to credit purchasers.
The Directive provides for a period of 90 days from receipt of a complete licensing application by the competent national authority (in France, the ACPR) to inform the applicant of the granting or refusal to grant the license. The Ordinance also refers to a decree of the Conseil d’Etat to set this deadline (not published to date), which we suspect will keep… a 90-day delay! Above all, the decree should provide a clarification on the information that the applicant provides to the ACPR.
Usually, one of the major consequences of the licensing process (especially in the financial sector) will be the benefit of a European passport. Regarding credit servicers, this passport should allow them to provide their services under the Freedom to Provide Services (FPS) or through a branch, in a Member State other than their home Member State.
Finally, the Ordinance specifies that credit servicers with ongoing business may continue their activities until their license is granted and no later than 29 June 2024.
Credit servicers must carry out a complete overhaul of their internal frameworks to be able to submit their licensing application to the ACPR as soon as possible, to ensure continuation of their activities after 29 June 2024. This is a very short timeframe, considering the magnitude of the internal organization that credit servicers must undertake.
Increased transparency requirements
Information requirements previously existed within the codes of ethics of professional organizations, and in particular the National Federation of Corporate Information, Debt Management and Civil Investigation (“FIGEC”). However, the Ordinance reinforces, and makes binding the obligations of credit purchasers and credit servicers vis-à-vis borrowers.
Indeed, the new Article L.54-11-10 of the French Monetary and Financial Code outlines the information to be provided to the borrower prior to the initial debt recovery, once the NPL contract or the rights arising from it have been transferred. This obligation also applies whenever the borrower or credit purchaser requests such information. Should a decree specify the information to be provided, it should also address the format of this transmission (e.g. the possibility of using digital transmission).
According to the Directive, the Ordinance does not only aim at transparency towards the borrower, but also at transparency vis-à-vis the regulator.
Therefore, the obligation to provide information to the ACPR must relate to:
(a) a credit servicer’s wish to outsource its credit management activities to a credit management service provider, prior to such outsourcing,
(b) information provided by credit institutions to the ACPR on (i) the identity of the purchaser of credits, (ii) the aggregate outstanding amount of the PNP contracts assigned or the rights arising therefrom, (iii) the number and size of the NPL contracts assigned or the rights arising from them and (iv) whether or not the assignment is extended to the rights of the creditor and, if applicable, the types of assets that secure the NPL contracts, and
(c) credit purchasers who transfer the NPL contracts or the rights arising from them to another entity will be subject to the same reporting obligations to the ACPR as credit institutions.
Regarding points (b) and (c), the Ordinance refers to a future decree of the Conseil d’Etat to specify the information to be provided and their frequency of transmission (it being specified that the Directive provides for semi-annual reporting).
Managing the contractual relations between secondary market players
The Ordinance regulates both the credit management contract between the credit purchaser and the credit servicer and, the outsourcing contract between a credit servicer and a credit management service provider.
As a result, credit servicers and credit purchasers will have to carry out a “legal diagnosis” of their contracts to assess the extent to which they are, or not, compliant with the new regulation. If necessary, compliance will be required and will have to be implemented by amendments to the relevant contracts. Again, the deadline for the application of this new regime is quite short (29 June 2024).
In conclusion, this new regime which introduces a new regulated profession in the financial services sector, has a very ambitious objective: enabling credit institutions to meet prudential requirements and remain competitive in a context of rising interest rates, but also creating a secondary market for credit improving the liquidity of the sector and reducing borrowing costs, while protecting borrowers from the harmful practices that are sometimes observed.
