The inherent volatility of the financial market offers many opportunities but also poses significant risks. Following the 2007-2008 financial crisis, legislators in the European Union struggled to contain the non-performing exposure (NPE) cycle through legislative action.
As the next crisis loomed over the market as a result of COVID-19, the European Commission took decisive action and issued an NPE-related communication – COM (2020) 822 Final (NPE Action Plan) – which tackled non-performing loans in the aftermath of the pandemic. From the NPE Action Plan, Directive (EU) 2021/2167 of the European Parliament and of the Council of 24 November 2021 on credit servicers and credit purchasers and amending Directives 2008/48/EC and 2014/17/EU (NPL Directive) emerged.
Overview of the NPL Directive
The NPL Directive aims to employ solutions that reduce the risks associated with non-performing loans (NPLs) on banks’ balance sheets and prevent their future accumulation. The NPL Directive is primarily concerned with the supervision of credit servicing companies, the introduction of unified rules for obtaining authorization to operate, and the maintenance of a publicly accessible list of licensed credit servicing companies. It also establishes transparent rules for credit servicers’ contact with borrowers and for conducting cross-border credit servicing activities.
Implementation in Poland
While the NPL Directive has not yet been implemented into the Polish legal system, a draft law of the Act on Credit Servicers and Credit Purchasers (Draft NPL Act) is currently pending in the Polish legislative process.
The Draft NPL Act establishes strict requirements for obtaining a license that permits credit servicing. It also establishes a register of credit servicing entities kept and supervised by the Polish Financial Supervision Authority (KNF) and introduces internal procedure and policy requirements for credit servicing entities, including risk assessment and management systems, borrower rights protection procedures, borrower financial assessment, and anti-money laundering procedures.
Additionally, the Draft NPL Act introduces a framework for credit servicing agreements by setting out obligatory contractual provisions, aimed at protecting the interests and rights of borrowers and credit purchasers.
Lastly, the Draft NPL Act positions the KNF as the primary authority overseeing credit servicing activities. It grants the KNF powers such as requiring changes to credit servicing entities’ policies and procedures, amending or terminating credit servicing agreements if found non-compliant with the Draft NPL Act, imposing fines, and even revoking credit servicing agreement licenses with immediate effect.
Potential Impact of the Draft NPL Act
While the Draft NPL Act provides for a robust regulatory framework, smaller financial entities may face issues adapting to these stringent regulations. For such institutions, compliance with the Draft NPL Act in its current form can prove costly both in terms of resources and financials considering the administrative and operational costs required to adhere to the regulation.
Furthermore, smaller entities might face a disproportionally greater challenge adhering to procedural requirements, potentially leading to market exits. This could limit competition and foster a less accessible secondary NPL market dominated by larger entities better prepared to handle regulatory pressure.
Emerging Opportunities in Poland
The rules and obligations introduced in the Draft NPL Act, such as increased borrower protection and regulatory clarity and oversight, can potentially make the growing secondary NPL market in Poland a more viable and stable option, even in times of economic downturn and uncertainty. This has the potential to attract new investors to the market.
Furthermore, the provisions of the Draft NPL Act stipulating increased supervision, such as risk assessment, borrower financial evaluation, anti-money laundering protocols, and other supervisory actions that can be taken by the KNF, will contribute not only to market fairness but also to market security. By addressing these systemic vulnerabilities, Polish banks will be better prepared to counteract future crises.
Once enacted, the Draft NPL Act will undeniably impact the market. If financial institutions and credit servicing entities are prepared for it, new opportunities for entry into the secondary NPL market will emerge. It will also pave the way for a robust, equitable secondary NPL market in Poland, provided that the balance between regulatory guidance and market adaptability can be maintained.
By Weronika Kapica, Partner, and Milosz Zolich, Student, Schoenherr
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
