The Secondary Market Directive (Smd) adopted in November 2021, was conceived with the aim of promoting the development of secondary markets for impaired loans within the European Union, eliminating obstacles placed at the national level to the transfer of impaired loans, taking care while at the same time strengthening the tools to protect the rights of assigned debtors.
According to an informal survey carried out by journalists from the 24-hour Sun, there would be several perplexities on the part of professionals in the sector regarding how the new legislation would be implemented and how it would be transposed within the Italian legal system.
The goal of the directive is to raise the degree of uniformity within the single European market by establishing universal regulations for operators and buyers of non-performing loans. This includes the adoption of unified standards to ensure appropriate behavior and effective control over the institutions that manage such credits. However, regulatory diversity among national legal systems is a challenge. To maintain the peculiarities of each state, the European Union has granted member countries some flexibility in implementation, a margin that Italy wants to use, although this generates debates.
With regard to the management of Non-Performing Loans (NPLs) in Italy, the most significant element of discretion is manifested in the decision to limit the applicability of the new law to NPLs, excluding so-called probable exposures to default (Utp). This choice is motivated by the Ministry of Economy and Finance (Mef) by the need for a more proactive management of Utp, which often requires new financing, an activity that in Italy is reserved for banks and other authorized credit institutions.
Pietro Bellone, partner at Allen & Overy, points out that integrating Utp into the regulatory framework, allowing financial support to be provided only by authorized third-party entities, could be a solution. However, current restrictions limit the scope of the law primarily to unsecured NPLs, significantly reducing the affected market. This approach seems to exclude a significant portion of the market, which in Italy has recorded transactions of about 32 billion euros, half of which were through secondary sales.
Surprisingly, the legislative proposal aims to expand the group of entities that can originate non-performing loans, potentially including credit funds, which Bellone says should instead remain outside the scope of the directive, which applies only to bank lenders. Implications for securitization companies purchasing these loans include only increased disclosure requirements with no benefit in terms of credit flow.
Uncertainties also extend to the regulation of credit servicers, envisioning the creation of a new registry for non-performing loan servicers under the supervision of the Bank of Italy. This registry would be open to both entities licensed in Italy and European entities operating cross-border. However, Bellone notes that this limitation to non-performing loans only could prove restrictive both for Italian managers wishing to offer services in other countries and for European managers interested in the Italian market.
The general impression is that the new rules, confronting existing financial restrictions in Italy, might not only fail to stimulate the development of a secondary market for NPLs, but even hinder it by introducing additional disclosure requirements. Reactions to the proposal under consultation will highlight the issues, and it remains to be seen whether and how the Mef will listen to such feedback.
In this regard,as highlighted by the latest update of Credit Village’s National NPE Market Observatory, in 2023, primary market transactions were lower than Re-Trade transactions in secondary markets, a case history that has not occurred since 2017.
Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.