LMA welcomes Council and Parliament amendments to proposed NPL Directive22 March 2019
The LMA welcomes several key revisions which have been made to the Proposed Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral (the "Proposed Directive"), put forward by both the Council and Parliament. This follows discussions held by the Association with EU regulators and legislators when the original proposals were first published in March 2018.
Important revisions include:
In respect of both the Council and Parliament texts:
- Narrowing the scope of the Proposed Directive so as to limit credit purchaser requirements specifically to NPLs. Whilst the LMA believes that the definition of what constitutes an NPL requires amendment to enable institutions to accurately assess not only which transactions qualify but also the point and frequency at which any assessment must be made, it is very encouraging to note that transfers of performing loans are now clearly excluded from scope; and
- the proposed requirement for non-bank transferees to inform competent authorities before enforcing a loan has been removed. The LMA had previously highlighted to regulators and legislators that the inclusion of such a requirement was simply unworkable in practice and risked acting as a disincentive to potential purchasers of NPL claims;
In respect of the Parliament text only:
- Limiting credit servicer requirements (as well as credit purchaser requirements) to NPLs; and
- deleting the Title V (Accelerated Extrajudicial Collateral Enforcement) provisions and removing the corresponding references to the AECE. This means that the originally proposed EU-wide out-of-court security enforcement process has been entirely removed.
However, notwithstanding the substantial progress achieved to date, there remain key issues which continue to require clarification/amendment. In particular:
- the mandatory disclosure duty at Article 13(1) would still result in significant changes to well-established, existing market practices based around the "buyer beware" principle in respect of NPL transactions. The LMA has emphasised that such provisions may act as a disincentive for existing lenders to transfer NPLs to non-banks, particularly if proposed Level 2 standards require provision of extensive and granular information which may not always be practicable or appropriate and which may in some cases cut across firms' existing processes for complying with market abuse requirements;
- whilst important amendments have been made to clarify the role of a credit servicer, there remains a risk of the regime capturing facility or security agents, which perform an important but purely administrative role in syndicated lending. The LMA has therefore requested an express carve out for entities performing these roles;
- many requirements of the Proposed Directive seem to have been drafted with consumer protection considerations in mind. Many of these measures are neither necessary nor appropriate for transfers of wholesale loans between sophisticated entities. The LMA is therefore concerned that extending these requirements to transfers of syndicated and other wholesale loans risks causing substantial (but unnecessary) disruption to current market practice;
- it is not clear whether requirements relating to credit purchasers apply only where there is change to the lender of record (for example, under a legal assignment) or whether they may also apply to other synthetic arrangements such as sub-participations and security assignments. The LMA has emphasised that the Proposed Directive should apply only to transfers that result in a change to the "lender of record" and have requested that this be made clear;
- the practical application of the Proposed Directive to syndicated lending arrangements remains unclear, for example, whether the presence of a single EU established credit institution in a syndicate would bring the whole facility agreement within scope of the Directive or whether the requirements would apply only to that single bank's participation; and
- where loans have traded multiple times before turning non-performing, it may not be possible to ascertain whether a participation in a loan was first originated by an EU bank and accordingly whether the requirements apply in respect of that loan. The LMA has noted that this could result in EU banks being at a competitive disadvantage under the Proposed Directive to those lenders not caught by the proposals;
In view of the above, the LMA has submitted a formal response to both the Council and Parliament requesting that certain changes be made before the Directive is finalised.
Commenting on the Proposed Directive, Nicholas Voisey, LMA Managing Director, said:
"Whilst the direction of travel is certainly positive, if outstanding issues are not addressed, we are concerned that the Directive will make it more, not less, difficult for EU banks to transfer NPLs from their balance sheets and will create an additional barrier to the development of secondary NPL markets. This would in turn reduce liquidity and may limit the ability of banks to extend further credit to consumers and SMEs, undermining a key objective of the Directive and the broader CMU and Banking Union project."
"We have already had meaningful and constructive discussions with the European Commission and various MEPs on this matter and will look to build on this dialogue over the next few weeks".