Major EU member states (such as Spain, France, Germany and Italy) have begun implementing the Directive on credit servicers and credit purchasers of non-performing loans ("NPLs") (the "Directive") with a view to meeting the Directive’s 29 December 2023 implementation deadline.

The Directive’s implementation is crucial to create a unified secondary market for the direct sale of NPLs in the EU, as it should establish the regulatory bases for two of the market’s main players: credit purchasers (generally large investment funds or entities specialised in the management of this type of asset) ("Purchasers") and credit servicers (the “Servicers”).

The Directive has two main objectives: (i) on the one hand, creating a solid, stable and transparent legal framework for Purchasers thus reducing transaction costs, and (ii) on the other hand, consolidating and unifying the legal status of Servicers throughout the EU.

There is a clear mandate to eliminate regulatory barriers to Purchasers in each member state, as regulatory restrictions would only produce inefficiencies and asymmetries that would harm the relative prices among member states. NPL portfolios are generally purchased by legal entities that are part of a large investment fund’s corporate structure and that only take major strategic decisions regarding the acquired portfolio, delegating its day-to-day management – and thus regular interactions with debtors – to the Servicers. Therefore, the regulatory requirements for Purchasers and Servicers should not be equivalent, and this is clear from the text of the Directive.

On the other hand, the role of Servicers has been developed at a national level and, to date, at different speeds. For example, the Servicers in Spain do not currently have a comprehensive set of regulations. The Directive’s implementation should give them their own common regulatory status to prevent non-specialised companies from carrying out their role; to establish uniform rules for them across the EU; and to enable Servicers to render services across member states, by either establishing a branch or directly providing cross-border services (as banks and financial services companies can do through the EU passporting system).

It remains to be seen if the Directive achieves its aims in practice, but the framework it sets up does, in our view, provide the right basis to drive forward an effective secondary market and, as a result, reduce the NPL holdings of banks across the EU, some of which are significant, both as a result of COVID-19 related lending and the financial crisis-related NPL holdings still held by banks before the pandemic took hold.