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| Financial Law Update | Back to article summary. |
| Sub-prime and other non-bank lenders now regulated in Ireland | ||
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| The crises in the US sub-prime housing market where thousands of borrowers with low income and poor credit histories defaulted on their mortgage payments due to rising rates caused a ripple effect across the financial world. In a very high profile case, the UK based bank, Northern Rock, was hit as a direct result of the sub-prime crises which resulted in hundreds of Irish customers queuing outside the Northern Rock Dublin branch to withdraw their savings, writes Joe Beashel. | ||
The crises in the US sub-prime housing market where thousands of borrowers with low income and poor credit histories defaulted on their mortgage payments due to rising rates caused a ripple effect across the financial world. In a very high profile case, the UK based bank, Northern Rock, was hit as a direct result of the sub-prime crises which resulted in hundreds of Irish customers queuing outside the Northern Rock Dublin branch to withdraw their savings. In this context, it is not a surprise that legislators have sought to react to such international events by addressing the fact that many non-traditional lenders in Ireland were not subject to supervision and oversight by the Financial Regulator. The introduction of new provisions in Section 19 of the Markets in Financial Instruments and Miscellaneous Provisions Act 2007 (‘the Act’) enacted on 1 November, provides for a new regulatory regime for non-deposit taking lenders to be called ‘retail credit firms’ and ‘home reversion firms’. Though these changes have been introduced at relatively short notice, the regulation of non-bank lenders to consumers is something the Financial Regulator has been anxious to see addressed for quite some time.
Purpose of Section 19 Section 19 provides that all non-deposit taking lenders engaged in retail lending will be subject to the Financial Regulator’s authorisation and ongoing supervision regime by way of amendment to Part V of the Central Bank Act 1997 (‘CBA’). Part V provides for the framework for the supervision of ‘regulated businesses’ previously applicable only to bureaux de change and money transmission businesses. Section 19 as amended extends the definition of a regulated business in Part V of the CBA to include a ‘retail credit firm’ and a ‘home reversion firm’. Retail Credit Firm and Home Reversion Firm The definition of a ‘retail credit firm’ includes a person prescribed as a credit institution under the Consumer Credit Act 1995 and a person who holds itself out as carrying on the business of and whose business consists of providing credit directly to relevant persons but does not include credit intermediaries or regulated financial service providers. Also excluded are credit intermediaries authorised under the Consumer Credit Act and, subject to some restrictions, to persons who only provide credit on an occasional basis. A ‘relevant person’ (borrower) for this purpose is a natural person within the State other than a regulated financial service provider or a person who satisfies the criteria of a ‘professional client’ for the purposes of the Markets in Financial Instruments Regulations 2007. The definition of ‘credit’ inserted in the CBA includes a cash loan whether or not provided on a security of a mortgage or charge over an estate or interest in land but does not include credit granted by a credit union or a friendly society. A ‘home reversion firm’ is a firm that enters an agreement with a vendor for the conveyance by the vendor to the home reversion firm of an estate or interest in land for a discounted sum and the vendor retains the right to live in the residence until the occurrence of a specified event detailed in the agreement. This event usually involves the death of the vendor. Although a home reversion agreement is not a credit agreement, such agreements have been subject to the new requirements on the basis that they have a similar effect as a lifetime mortgage or equity release and therefore ought to be regulated. New Sections in Part V Part V of the CBA provides for the regulation of bureaux de change and money transmission business both of which operate in a different regulatory environment to home reversion firms or those providing retail credit. With this in mind Section 19 adds five new sections (Sections 29A, 31A, 32A, 33A and 34C) to Part V of the CBA to enable the Financial Regulator to impose conditions and requirements on authorised firms. The Financial Regulator will have the power to impose requirements in the interests of consumer protection and orderly regulation including powers to oblige firms to provide specific information in respect of consumer credit and home reversion agreements and to extend the Consumer Protection Code (‘CPC’) to retail credit and home reversion firms. Section 29A gives the Financial Regulator the power to exempt a person from being required to hold an authorisation as a retail credit firm in relation to the provision of credit if the total amount of credit to be provided is such that it is reasonable to assume that the borrower will be in a position to negotiate on equal terms or the person is exempted from being required to hold a banking licence or the person provides the credit solely for charitable purposes. Section 31A sets out the criteria a retail credit firm or home reversion firm will have to satisfy in order to obtain or retain authorisation. These criteria relate to the probity and competence of the firm’s directors and managers, suitability of qualifying shareholders, organisation structure and management skills of the firm, the conduct of the firm’s business, financial resources and any other matter the Financial Regulator considers necessary in the interests of the proper and orderly regulation and supervision of authorised firms. The Financial Regulator will want to ensure that the organisational structure is such that it is capable of being supervised adequately. Section 32A enables the Financial Regulator to specify the classes of services and additional services the firm may provide. The Financial Regulator can at any time before granting or refusing the authorisation make the appropriate inquiries or request further information from the applicant and will have regard to any relevant supervisory requirement imposed on the applicant by an authority in another EEA country, that appears to exercise a regulatory role similar to that of the Financial Regulator. The Financial Regulator may impose conditions on the authorisation of a retail credit firm or home reversion firm under Section 33A. Such a condition can be imposed on a single authorised firm or on a class of authorised firms. These conditions or requirements may relate to the level of training or qualification of managers, the provision of information to the Financial Regulator, the application of a prescribed code of practice that may be imposed on an authorised firm, or a class of authorised firms or on an associated undertaking. Consumer Protection Code and Financial Services Ombudsman Scheme Once authorised, retail credit firms and home reversion firms will become regulated financial service providers for the purposes of both the Financial Regulators CPC and the Financial Services Ombudsman Scheme. The CPC is issued by and in the name of the Financial Regulator and consists of several general principles and service specific rules. Under the CPC regulated entities are required to ensure that in all dealings with customers and within the context of its authorisation it acts fairly, honestly and professionally in the best interests of the customer. The Financial Services Ombudsman Scheme provides for an impartial arbiter of unresolved disputes. The Ombudsman is a statutory officer who deals independently with complaints from consumers about their individual dealings with all financial services providers that have not been resolved by the providers. Transitional Provisions Firms currently engaged in retail credit and home reversion business will be taken to be authorised, provided they apply to the Financial Regulator within three months from commencement of Part 2 of the Act. At the time of writing it was not clear when these new provisions would be commenced but it is expected that this will take place very soon. The Financial Regulator can impose any conditions or requirements on the firm it deems necessary or direct a temporary suspension of the business which cannot exceed three months. Offences It is an offence under Part V of the Act for a person to carry on a regulated business unless the person is the holder of an authorisation. A person who contravenes this commits an offence and if tried summarily, is liable on conviction to a fine not exceeding €2,000, or if tried on indictment, is liable on conviction to a fine not exceeding €100,000. Alternatively, the Financial Regulator has the power to impose administrative sanctions in relation to prescribed contraventions by regulated financial service providers and persons concerned in the management of such firms. The Financial Regulator has a broad power to impose sanctions ranging from a caution or reprimand to a monetary penalty not exceeding €5 million. Summary The introduction of a regulatory regime requiring non-deposit taking lenders to be authorised and supervised by the Financial Regulator closes what has always been something of an anomaly in Ireland’s regulatory regime. Affected firms will have a relatively short time to prepare applications for authorisation to the Financial Regulator, and to review and amend their processes and procedures to be consistent with the Consumer Protection Code, to train their staff on these new procedures. Such firms will also have to ensure their staff meet the Financial Regulator’s Minimum Competency Requirements. |
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Joe Beashel is a Partner in the Banking and Financial Services Department and Head of the Regulatory Risk Management and Compliance Group at Matheson Ormsby Prentice. He can be contacted by phone: +353 1 232 2000 or by email: joe.beashel@mop.ie. Further information on the firm is available at www.mop.ie |
