In the wake of the EBA’s final guidelines on the management of non-performing loans (“NPLs”) at the end of 2018, the European Union has published on 8 December 2021 a Directive on credit servicers and credit purchasers of NPLs ("the NPL Directive").

The establishment of a comprehensive strategy to address the NPL issue is a priority for the EU, particularly in light of the significant lending that has taken place in response to the COVID-19 pandemic[1]. 

One of the main issues at stake is to reduce current stocks of NPLs across the EU, as well as to prevent any excessive build-up of NPLs in the near future, especially due to the risks resulting from the economic measures implemented in response to the COVID-19 crisis. From a French point of view, the health crisis has generated high levels of credit among businesses (including from state-guaranteed loans). This is likely to trigger an increase in the level of NPLs across the country’s economy once the various economic measures introduced by the government are terminated. This phenomenon illustrates why such a risk of accumulation remains a hot topic notably in France.

The Directive, together with actions taken by both the ECB in the context of banking supervision and the EBA, is intended to create an appropriate environment for EU credit institutions to sell the NPLs on their balance sheet to third parties (i.e. credit purchasers) or, as the case may be, to properly service them through outsourcing solutions (i.e. credit service providers), when they (the institutions) lack the staff and appropriate expertise to do so. Such services include collecting payments from borrowers, renegotiating terms and conditions, and dealing with complaints.

However, while it seems necessary to continue to clean up the balance sheets of certain banks, irrespective of the type of borrower, the Directive is clear that achieving the development of efficient secondary markets in a dedicated and coherent manner must not come at the expense of borrowers’ rights[7] or at the cost of the deterioration of the EU banking system as a whole. 

Although we can attest to the loosening of the banking monopoly in the past few years, the transfer of distressed assets to specialised purchasers that have the necessary risk appetite and the expertise to manage such assets will require compliance by them with a set of harmonised supervision standards[8]. Regarding licenses, any in-scope credit servicers will have to obtain regulatory authorisation from their national regulator[9] to carry out their activities within their own jurisdictions and throughout the EU Single Market[10], whereas in-scope purchasers will not.

This news is likely to be welcomed by the lending sector as currently regulatory requirements to carry out this type of activity may vary between EU member states, which makes them particularly burdensome to comply with by non-EU entities. Indeed, among the current credit purchasers, US funds clearly dominate the market with more than 160 billion euros of acquisitions between 2015 and 2019, mainly in Italy and Spain[11]. 

The Directive is to be transposed into national law by 29 December 2023, with the license requirement starting to apply to new market players from 30 December 2023, while existing actors will have until 29 June 2024 to acquire the new status.

[1]    See Recital 1 of the Directive of the European Parliament and of the Council on credit servicers, credit purchasers and the recovery of collateral (the “Directive”).

[2]    See Recitals 4 and 6 of the Directive.

[3]    See Recital 23 and Article 12 of the Directive.

[4]    See Article 2(1) of the Directive.

[5]    See Recital 7 of the Directive.

[6]    See Article 3(9) of the Directive.

[7]    See Recital 9 and Article 11 of the Directive.

[8]    See Recital 9 and Title IV of the Directive.

[9]    See Articles 4 and 7 of the Directive.

[10]  See Article 13 of the Directive. 

[11]   DebtWire, Top NPL Buyers ready to shop more, 26 April 2019; Government action key to tackling coronavirus NPLs and investor opportunities, 21 October 2020.