Licences for Non-Banking Consumer Loan Providers
At the end of March 2016, Directive 2014/17/EU of the European Parliament and of the Council should be implemented with the help of the new Consumer Loan Act. This change will create new requirements for non-banking consumer loan providers.
On 10 February 2016, the new Consumer Loan Act drafted by the Czech Ministry of Finance should be deliberated at the 39th session of the Chamber of Deputies as a part of the 1st reading. This document, fulfilling the objective of Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property, rescinds the currently valid Act no. 145/2010 and introduces many new rules for the distribution of retail loans on the market. From a conceptual standpoint, it is still based on the current legislation. However, the draft intends to introduce several important changes, especially relating to the approach to the institutional regulation of the retail market. These changes do not only affect new market entrants, but also current market entities, in particular non-banking providers who will be required to comply with the new legislation.
The draft act means for non-banking consumer loan providers significant tightening of entry requirements for the credit market. While under the current legislation, anyone who was granted a trade licence for carrying out a trade could do business in this manner under the current legislation, now non-banking entities will be required to fulfil the specific conditions set out in the act. Based on their fulfilment, the Czech National Bank will issue a special licence. Such authorised entities will then be entered in the register kept by the CNB, and the CNB will carry out supervision over these entities. The licence will be granted for a limited period of five years, with the option of repeated renewal for another 60 months upon payment of an administrative fee.
The licence itself is issued in administrative proceedings, which should take a maximum of four months. The application is filed on a standard form, and all documents demonstrating that all legal conditions have been fulfilled must be attached to the application.
Currently, only a certain type of company may obtain a licence. The company must be a joint-stock company (a.s.), limited liability company (s.r.o.), or a European company with registered capital of at least CZK 20,000,000, and the company’s registered office must be in the Czech Republic. The origin of the registered capital must be transparent and unobjectionable. A limited liability company also has the obligation to establish a supervisory board with powers similar to the supervisory board of a joint-stock company.
In addition, the entity that fulfils the above-described requirements must be trustworthy. In practice, this means that the applicant does not have a record in the criminal register, bankruptcy was not declared on the assets of the company within the past five years, and it was not a member of the body of a legal entity that has become insolvent. This is also a condition in the draft act for entities controlling the applicant
Moreover, the professional competency of the company must be demonstrated, not only for the applicant itself, but also for any entity or person contributing to the provision of consumer loans. The explanatory report for the draft act provides at this time three options for demonstrating this competency, and in all likelihood, even despite the fact that these options are recommended in the explanatory report, competency will be demonstrated by the required state-accredited professional examination. These examinations should be given by private entities with special authorisation from the government.
It is also important that the applicant adapt its internal regulations to the standards set out under law. The system of control and governance must be correctly set so that it is appropriate from the standpoint of providing consumer loans and with respect to meeting the obligations related to combatting money laundering and the financing of terrorism. The system of control and governance must be proportionate to the nature, complexity, and scope of activities that the non-banking provider carries out.
Emphasis in the licensing procedure will also be placed on the proper drafting of the applicant’s business plan. The planned business strategy and the anticipated financial results must be taken as real economic calculations and must be properly submitted.
Last but not least, a requirement for the application is to submit to the CNB a proposal for the rules of procedure for clients when negotiating consumer loans. The importance of this condition is directly based on the directive’s objective to protect consumers. In particular, it is essential that the loan provider act with due managerial care when dealing with clients. Another important aspect is to act in an honest and transparent manner and to always have the consumer’s interest in mind. Communication with clients must be clear, direct, and without misleading information. This also applies to marketing materials used by the provider.
The act should come into effect at the end of March 2016. At this time, the deadline set by the directive for implementation of the act is coming to an end. For this reason as well, it is good to be prepared for the changes that will affect the current non-banking providers.
Current providers operating in this sector based on a trade licence are obliged to harmonise their activities with the draft act, and in connection with this, to submit to the CNB an application for issuing a licence within six months of the draft act coming into effect. The CNB must process the applications within 18 months of submission. If an application was promptly filed, the provider may continue to carry out its activities. In the opposite case, the provider’s licence expires upon lapse of the six-month deadline.
Providers not operating under a trade licence (banking institutions, electronic money institutions) must also harmonise with the act within six months of the Consumer Loan Act coming into effect.
As mentioned above, the new legislation should focus in particular on consumer protection. In order to achieve this objective, measures were implemented to ensure the improved organisation of the consumer loan market, regulation by the government, and a more comprehensive system of control with the assistance of the Czech National Bank. Although it may seem that the draft act places overly strict formal and administrative demands on providers, it should be remembered that such measures will help to reduce the chaos currently present on the retail account market. This could purge the market of providers who often use unfair practices that disadvantage borrowers. Despite the high demands for issuing licences, the positive side of this new legislation is the harmonisation of the rules for the consumer loan market.
It should be emphasised that the proposed six-month deadline for harmonisation with the draft legislation seems to be extremely short for careful preparation of all needed documents for granting the licence. Thus, current non-banking providers should start preparing now for the changes that will occur with the arrival of the new legislation.