In recent years, non-banks have changed the credit landscape in the European Union (“EU”). Fintech lending platforms and other non-bank lenders (including Bigtechs) have entered and disrupted lending markets.
Credit intermediation by firms that are not banks is not new and some business models are indeed well established. However, the use of new technologies and the digitization of financial services are attracting new players to local EU markets.
In February 2021, the European Commission (“THIS”) published its call for advice on digital finance and related issues. The EC has asked the European Supervisory Authorities to analyze the fragmentation of the financial services value chain, the growth of digital platforms and mixed business groups, and to make recommendations so that the EU regulatory framework remains fit for purpose. As part of the call for advice, the EBA was specifically asked to carry out an analysis of the non-bank lending sector.
On May 4, 2022, the European Banking Authority (“EBA”) issued a final report (the “Report”) outlining its technical advice to the European Commission on non-bank lending. Non-bank loans are defined as loans granted by financial intermediaries outside the European regulatory perimeter for financial services. This opinion responds to the Commission’s call for advice on digital finance and related issues of February 2021.
The EBA observes that the scale of non-bank loans remains relatively small compared to loans granted by banks. Nevertheless, developments in the areas of Fintech and BigTech (including in relation to crypto-assets) are reshaping the landscape. Trends outside the EU (particularly in the US and Asia) show that non-traditional lenders have successfully developed and deployed alternative business models.
The EBA concludes that regulatory regimes for non-bank lending remain largely unharmonised across the EU. The EBA warns that the largely non-harmonised regulatory regimes across the EU can create challenges for regulators and other stakeholders. The EBA further recommends changes to the regulatory framework that may affect lending solutions such as buy-it-now, pay-later and peer-to-peer (“P2P”) platforms.
The report identifies a number of areas where the provision of credit by non-bank lenders creates specific risks, and makes proposals to address these risks. The report focuses on four aspects: (i) surveillance, (ii) consumer protection, (iii) anti-money laundering (“AML”), and (iv) macroprudential risks.
The EBA proposals are likely to have a significant impact on the business models of non-bank lenders. In particular, viewed in consistency with the proposed updates to the Consumer Credit Directive (“CDD”) and the regulation on capital requirements and the proposal to adopt a European regulation on the fight against money laundering.
Non-bank lending remains largely unharmonised in the EU. In some cases, specific authorization or registration is required to engage in non-bank lending activities, and entity-based requirements apply. In other cases, there are no entity-based requirements, but only activity-based requirements, or the activities may be unregulated and therefore no prudential or conduct requirements business does not apply.
The EBA suggests strengthening the authorization and admission conditions in order to create a more effective supervisory framework. Currently, various non-bank lenders are not subject to any entity-specific requirements and cannot be appropriately monitored.
The reports identify a number of exemptions that non-bank lenders can rely on under the Consumer Credit Directive “CDD”), excluding specific business models (e.g. immediate purchase and subsequent payment for smaller amounts, or microcredit providers from licensing requirements In line with the EC proposal for a new CDD, the EBA recommends removing this exclusion.
(ii) Consumer Protection
The EBA also proposes to strengthen the information obligations of lenders in order to ensure that they act fairly, that they are efficient and well adapted to new forms of lending. In the context of marketing that takes place outside of business premises and the provision of online services, the advertising requirements and the extent of the pre-contractual information required are worth reviewing. EBA notes that the EC proposal in the CDD largely addresses these concerns.
In addition, the EBA proposes to strengthen the requirements for solvency assessment.
Not all non-bank lenders are currently subject to AML requirements. To fill this regulatory gap, the EBA proposes to bring all non-bank lenders within the scope of the EU anti-money laundering framework. All non-bank lenders, even if not subject to licensing under financial regulations, will be required to take AML/CFT measures. The draft EU AML regulation already addresses this concern. If passed, the AML Regulation will place more businesses within the scope of AML requirements.
(iv) Macroprudential and microprudential risks.
In order to enable proper mapping and to obtain an integrated overview of macroprudential risks and vulnerabilities, the EBA proposes to consider the establishment of a standardized reporting infrastructure at EU level (possibly drawing taking advantage of existing monitoring tools and avoiding duplication with them). In addition, the EBA proposes to consider the possibility of introducing activity-based macroprudential measures to cover all credit providers, based on a minimum harmonization of tools that are already widely applied in the EU. .
With regard to microprudential risks, the EBA proposes to examine the benefits and costs of common minimum requirements for non-bank lenders. This improves the resilience of the non-banking sector, ensures the continuity of the availability of finance in the EU economy and simultaneously strengthens customer protection.
- Click here for the EBA’s final report on the response to the CfA non-bank loan request on digital finance (EBA/Rep/2022);
- Click here for the EBA letter to the European Commission: request from the European Commission to the EBA for a technical opinion on non-bank lending (EBA-2022-D-3928);
- Click here for the press release.