title: Opinion of the European Central Bank of 12 February 2019 on banning the use of euro 500 denomination banknotes and on certain amendments to antimoney laundering legislation (CON/2019/5)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 12 February 2019 on banning the use of euro 500 denomination banknotes and on certain amendments to antimoney laundering legislation (

text: ) Introduction and legal basis

text: On 18 December 2018, the European Central Bank (ECB) received a request from Finanstilsynet (the Danish Financial Supervisory Authority) for an opinion on a draft law amending the Law on measures to 1 2 prevent money laundering and financing of terrorism and the Law on financial business (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union (TFEU) and the second indent of

text: Article 2(1) of Council Decision 98/415/EC

text: 1. Purpose of the draft law

text: 1.1 The three main purposes of the draft law are to: (i) implement certain provisions of

text: Directive (EU) 2018/843

text: of the European Parliament and of the Council , which amended

text: Directive (EU) 2015/849

text: of the European Parliament and of the Council , into Danish law; (ii) implement certain parts of a political agreement made on 19 September 2018 between the majority of the Danish political parties, including the parties of the Danish government, to further strengthen initiatives against money laundering and terrorist financing (hereinafter the ‘Political Agreement’) into Danish law ; and (iii) ensure further alignment of Danish legislation with

text: Directive (EU) 2015/849

text: . 1.2 As part of the implementation of the Political Agreement, the draft law proposes to ban the use of

text: 1 Lov om forebyggende foranstaltninger mod hvidvask og finansiering af terrorisme.

text: 2 Lov om finansiel virksomhed.

text: Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).

text: 4 Directive 2018/843 of the European Parliament and of the Council of 30 May 2018 amending

text: Directive (EU) 2015/849

text: on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives

text: and

text: (OJ L 156, 19.6.2018, p. 43).

text: Directive (EU) 2015/849

text: of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending

text: Regulation (EU) No 648/2012

text: of the European Parliament and of the Council, and repealing Directive

text: of the European Parliament and of the Council and

text: Commission Directive 2006/70/EC

text: (OJ L 141, 5.6.2015, p. 73.

text: 6 Aftale mellem regeringen (Venstre, Liberal Alliance og Det Konservative Folkeparti) og Socialdemokratiet, Dansk Folkeparti, Radikale Venstre og Socialistisk Folkeparti om yderligere initiativer til styrkelse af indsatsen mod hvidvask og terrorfinansiering, af 19. september 2018. euro 500 denomination banknotes (hereinafter ‘€500 banknotes) in Denmark . The proposed provision provides that €500 banknotes must not be ‘used’. A list of means of use in the provision includes, but is not limited, to dispensing, depositing, exchanging, using as a means of payment or transferring, in Denmark. According to the explanatory notes to the draft law, simple possession of €500 banknotes is permitted, which includes bringing €500 banknotes into and out of Denmark. Furthermore, the ban only applies in Denmark and does not limit the use of €500 banknotes outside of Denmark. The explanatory notes also state that the ban is worded as broadly as possible to ensure that it cannot be circumvented, e.g. by transferring €500 banknotes as a gift. Intentional or grossly negligent violation of the ban will be punishable by a fine, except in such cases where a higher punishment applies pursuant to the Danish Penal Code . The ban is proposed on the basis of the Political Agreement and is also included in the Danish strategy for the combatting of money laundering and terrorist financing from 2018 to 2021 . 1.3 The explanatory notes further state that reports show that €500 banknotes are primarily used by criminals and that a number of specific cases in Denmark and abroad in recent years have shown that €500 banknotes have been used for criminal activities to a great extent. The explanatory notes also refer to the fact that on 4 May 2016, the ECB Governing Council announced that the ECB would stop producing €500 banknotes and that the Financial Action Task Force has recommended that producing the 500-euro banknotes be stopped. 1.4 The explanatory notes also consider the proposed ban in relation to Union law . These notes mention that the ban constitutes a restriction on the movement of capital and payments between Member States and also between Member States and third countries which, as a main rule, is prohibited under

text: Article 63(1)

text: TFEU. However, the notes also state that the ban is justified as it is introduced for compelling public interest, namely for public order and safety in order to prevent €500 banknotes being used for criminal activity . The ban is also found to be proportionate to the interest it is seeking to protect . 1.5 The draft law does not propose to ban high denomination banknotes issued in currencies other than the euro. 1.6 As part of the implementation of

text: Directive (EU) 2015/849

text: , as amended, the draft law also proposes to introduce a new exemption from the confidentiality obligation imposed on Finanstilsynet whereby exchange of information between Finanstilsynet and the ECB will not constitute a violation of that obligation . This provision implements

text: Article 57

text: a(2) of

text: Directive (EU) 2015/849

text: , pursuant to which the obligation of professional secrecy shall not prevent the exchange of

text: 7 See Section 1, no. 11 of the draft law.

text: 8 See Section 1, no. 75 of the draft law, which amendments the second sentence of Section 78(1) of the Law on measures to prevent money laundering and financing of terrorism.

text: 9 See page 2 of the Political Agreement. See also page 20 of Annex 1 to the Political Agreement.

text: 10 See Anklagemyndigheden, Statsadvokaten, Hvidvasksekretariatet og Sporingsgruppen, Årsberetning 2010. See also Europol, ‘Why is cash still king?’, European Police Office, 2015.

text: 11 See the ECB press release of 4 May 2016, available on the ECB’s website at www.ecb.europa.eu.

text: 12 See pages 39-40 of the explanatory notes to the draft law.

text: 13 See the second paragraph on page 40 of the explanatory notes to the draft law.

text: 14 See the second paragraph on page 40 of the explanatory notes to the draft law. information between competent authorities supervising credit and financial institutions in different Member States in accordance with this Directive or other legislative acts relating to the supervision of credit and financial institutions, including the ECB acting in accordance with

text: Council Regulation (EU) No 1024/2013

text: 2. Scope of the opinion

text: This opinion focuses on the provisions of the draft law concerning: (a) the proposed ban on the use of €500 banknotes in Denmark; and (b) Finanstilsynet’s sharing of confidential information with the ECB. The ECB stresses that it does not opine on whether the draft law effectively implements

text: Directive (EU) 2015/849

text: or the amendments introduced by

text: Directive (EU) 2018/843

text: into Danish law.

text: 3. Proposed ban on use of €500 banknotes in Denmark

text: 3.1 In May 2016, the ECB Governing Council concluded a review of the denominational structure of the Europa series of the euro banknotes. It has decided to permanently stop producing the €500 banknote and to exclude it from the Europa series, which is the second series of euro banknotes, taking into account the concerns that this banknote could facilitate illicit activities. In view of the important circulation of this denomination, also at international level, and to safeguard the trust in euro banknotes, the €500 will remain legal tender and can therefore continue to be used as a means of payment and store of value. The €500 banknote, like the other denominations of euro banknotes, will always retain its value and can be exchanged at the national central banks of the Eurosystem for an unlimited period of time. Credit institutions, bureaux de change and other professional cash handlers may recirculate €500 banknotes. 3.2 Under Article 3(4) of the Treaty on European Union, the ‘Union shall establish an economic and monetary union whose currency is the euro’. Denmark has an exemption from participating in the third stage of the economic and monetary union, pursuant to the Protocol (No. 16) of the TFEU on certain provisions relating to Denmark. The effect of the exemption for Denmark is that all articles and provisions of the Treaties and the Statute of the ESCB referring to a derogation shall be applicable to Denmark . Therefore, in accordance with Protocol (No 16) and

text: Article 139(2)

text: (d) TFEU,

text: Article 128

text: TFEU, which states that the euro banknotes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Union, is not applicable to Denmark. 3.3 Under the principle of sincere cooperation set out in Article 4(3) of the Treaty on European Union, Member States shall facilitate the achievement of the Union's tasks and refrain from any measure which could jeopardise the attainment of the Union's objectives. The recognition of the monetary law (lex monetae) of a State is a universally recognised principle of customary international law .

text: Council Regulation (EU) No 1024/2013 of 15 October 2013

text: conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).

text: 17 See paragraph 1 of Protocol (No. 16) of the TFEU on certain provisions relating to Denmark.

text: 18 See, for example,

text: Recital 8

text: of

text: Council Regulation (EC) No 1103/97 of 17 June 1997

text: on certain provisions relating to the introduction of the euro (OJ L 162, 19.06.1997, p. 1); see also the European Commission’s Communication on ‘The impact of the introduction of the euro on capital markets’ (COM(97)0337 final) (Euro Papers 3. July 1997. The law of the country issuing a currency determines, inter alia, the questions concerning the identity of the currency and the currency's status as legal tender, including which banknotes and coins constitute legal tender. The principle of lex monetae generally applies regardless of the place of payment or the governing law of a contract setting out a payment obligation. 3.4 Against this backdrop, the Danish authorities are respectfully invited to refrain from introducing a ban on the use of the €500 banknote in Denmark. No such ban has been introduced at Union level. On the contrary, and as noted above, while the ECB has decided to permanently stop producing the €500 banknote, the €500 banknote will remain legal tender and can therefore continue to be used as a means of payment and store of value. Insofar as Danish parties have entered into commercial transactions denominated in euro, often with counterparties in the euro area, the ECB respectfully suggests that the Danish authorities should, in line with the principle of sincere cooperation and the monetary law of the Union, acknowledge that, notwithstanding the fact that production of the €500 banknote will cease, it is still legal tender for the discharge of debts denominated in euro and may continue to be used as a means of payment and exchange. 3.5 Data on the flows of €500 banknotes between the banking sector and the non-banking sector within and outside the euro area suggest that there are legitimate reasons for using €500 banknotes including, among others, the instant settlement of common high-value payments or to temporarily hold assets in central bank money. The legitimate use of €500 banknotes is supported by results from an ECB survey on the use of cash in the euro area, which indicate that a distinctly larger-than-expected share of the population possessed high-denomination banknotes and received and/or spent them for legitimate purposes . Although €500 banknotes may be used for money-laundering activities, so may any other denomination as well as non-cash means of payment. Therefore, the assumption that €500 banknotes are predominantly used by criminals is unsubstantiated. No evidence has been provided by authorities that €500 banknotes are used for illegal activities in Denmark to a larger extent than the national currency, other euro banknote denominations or electronic means of payment. 3.6 Furthermore, the ECB considers that the draft law treats high-value banknote denominations unequally as it does not extend the proposed measures to other high-value banknote denominations, such as the 1000 Swiss francs banknote which has higher purchasing power.

text: 4. Finanstilsynet’s sharing of confidential information

text: 4.1 The ECB welcomes section 1, number 59 of the draft law which, in accordance with

text: Article 57

text: a of

text: Directive (EU) 2015/849

text: , as amended, contains explicit permission for Finanstilsynet to share confidential information acquired within its supervisory tasks under the existing law on measures to prevent money laundering and financing of terrorism with the ECB. The task of supervising credit institutions in relation to the prevention of the use of the financial system for the purposes of money laundering and the financing of terrorism has not been conferred upon the ECB. However, the

text: Brussels. Tab. Ann. Free.), p. 63.

text: 19 See Esselink, H., Hernández, L., ‘The use of cash by households in the euro area’, ECB Occasional Paper Series No 201, November 2017, European Central Bank, 2017. Available at: https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op201.en.pdf. outcomes of the anti-money laundering and counter-terrorism financing (AML/CFT) supervision are important to consider for the discharge of the specific tasks conferred upon the ECB concerning the prudential supervision of credit institutions under

text: Article 127(6)

text: TFEU and

text: Regulation (EU) No 1024/2013

text: . It is therefore of utmost importance that the ECB, as well as other prudential supervisors, receive timely and reliable information about money laundering and financing of terrorism risks and breaches of AML/CFT requirements by supervised entities from AML/CFT supervisors . In order to facilitate the exchange of information between the ECB and the AML/CFT supervisors within the European Economic Area, including Finanstilsynet, an agreement on practical modalities of exchange of information was prepared in line with

text: Article 57

text: a(2) of

text: Directive (EU) 2015/849

text: , as amended, with the support of the European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, and subsequently signed by the ECB on 10 January 2019. 4.2 As regards the implementation of

text: Article 57

text: a of

text: Directive (EU) 2015/849

text: , as amended, it is not entirely clear how the remaining parts of that Article are to be implemented into Danish law. In particular, it is unclear whether Finanstilsynet is permitted to disclose confidential information received within its AML/CFT supervision only to the ECB or whether it may disclose such information to other competent authorities supervising credit and financial institutions in different Member States in accordance with legislative acts other than

text: Directive (EU) 2015/849

text: as well. This would include disclosure to competent authorities in accordance with Directive

text: of the European Parliament and of the Council . Current Danish legislation on disclosing confidential information to Union/European Economic Area-based authorities appears to be limited to authorities that are responsible for ensuring compliance with AML/CFT legislation and does not cover disclosure to authorities responsible for supervising compliance with other legislative acts relating to the supervision of credit and financial institutions . As the Single Supervisory Mechanism consists of the ECB and national competent authorities, it is important to ensure that the national competent authorities can receive confidential information acquired by Finanstilsynet in its AML/CFT supervision, as envisaged in

text: Article 57

text: a of

text: Directive (EU) 2015/849

text: . The ECB therefore recommends that the draft law should be amended to ensure that disclosure of confidential information by Finanstilsynet to authorities responsible for the supervision of credit and financial institutions is permitted where such authorities are not responsible for the AML/CFT supervision. 4.3 Currently, the Union legislative framework on the exchange of AML/CFT-related information is currently undergoing revision by the legislators to facilitate the flow of information between relevant authorities. The Danish legislators may therefore consider authorising the Danish Financial

text: 20 See paragraph 1.2 of Opinion

text: . All ECB opinions are published on the ECB website at www.ecb.europa.eu.

text: 21 See Multilateral agreement on the practical modalities for exchange of information pursuant to

text: Article 57

text: a(2) of

text: Directive (EU) 2015/849

text: concluded between the European Central Bank and the undersigned Competent Authorities.

text: 22 See

text: Article 56 of Directive 2013/36/EU

text: of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive

text: and repealing Directives

text: and

text: (OJ L 176, 27.6.2013, p. 338). Intelligence Unit, Statsadvokaten for særlig økonomisk kriminalitet (the Danish State Prosecutor for Serious Economic and International Crime), to share confidential information with the competent authorities supervising credit and financial institutions under other legislative acts in other Member States, including the ECB, where such information is relevant to the performance of their tasks. The European Commission noted that divergent national transposition of

text: Directive (EU) 2015/849

text: leads to important differences in access to AML/CFT-related information . This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 12 February 2019. [signed] The President of the ECB Mario DRAGHI

text: 24 See paragraph 2b of the European Commission’s Communication on ‘Strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions’ (COM(2018) 645 final) (12 September 2018, Brussels), p. 4.


text: COM (2018) 834 final.

text: Se artikel 149 i avtalet om utträde.

text: Se artikel 128.4 i avtalet om utträde.

text: Se artikel 122 i avtalet om utträde.

text: Se artikel 123 i avtalet om utträde.

text: Se artikel 117 i avtalet om utträde.

text: Se t.ex. EU-domstolens dom av den 30 april 1974, R. & V. Haegeman mot Belgien,

text: mål C-181/73

text: , EU:C:1974:41, punkt 5; EU-domstolens dom av den 9 augusti 1994, Franska republiken mot Europeiska gemenskapernas kommission,

text: mål C-327/91

text: , EU:C:1994:305, punkterna 15–17. Se även ECB:s yttrande

text: . Alla ECB:s yttranden publiceras på ECB:s webbplats.

text: Se artikel 2 i förslaget till beslut.

text: Se artiklarna 164 och 166 i avtalet om utträde.

text: Se artikel 117 i avtalet om utträde.

text: Se t.ex. artiklarna 102, 103 och 116.3 i avtalet om utträde.

text: Se sida 4 i motiveringen.

publisher: Europeiska centralbanken

sprak: sv

title: Europeiska centralbankens yttrande av den 13 februari 2019 om ett förslag till rådets beslut om ingående av avtalet om Förenade konungariket Storbritannien och Nordirlands utträde ur Europeiska unionen och Europeiska atomenergigemenskapen (CON/2019/6)

serie: con

text: Inledning och rättslig grund

type: rubrik

text: Den 19 december 2018 mottog Europeiska centralbanken (ECB) en begäran från Europeiska unionens råd om ett yttrande över ett förslag till rådets beslut om ingående av avtalet om Förenade konungariket Storbritannien och Nordirlands utträde ur Europeiska unionen och Europeiska atomenergigemenskapen (nedan kallat förslaget till beslut).

type: stycke

text: ECB:s behörighet att avge ett yttrande grundas på artiklarna

text: och

text: i fördraget om Europeiska unionens funktionssätt eftersom förslaget till beslut avser ECB:s och Europeiska centralbankssystemets (ECBS). I enlighet med artikel 17.5 första meningen i arbetsordningen för Europeiska centralbanken har detta yttrande antagits av ECB-rådet.

text: Allmänna kommentarer

text: 1. ECB noterar att förslaget till beslut godkänner avtalet om Förenade kungariket Storbritannien och Nordirlands utträde ur Europeiska unionen och Europeiska atomenergigemenskapen (nedan kallat avtalet om utträde) på Europeiska unionens och Europeiska atomenergigemenskapens (Euratom) vägnar. ECB noterar särskilt bestämmelserna i avtalet om utträde som avser återbetalningen av det kapital som Bank of England inbetalat till ECB och Bank of Englands deltagande i de institutionella arrangemang som framgår av artiklarna

text: och

text: FEUF och stadgan för Europeiska centralbankssystemet och Europeiska centralbanken (nedan kallad ECBS-stadgan) under övergångsperioden. ECB noterar också bestämmelserna i avtalet om utträde som berör tillämpningen av bestämmelser i unionslagstiftningen om tillgång till dokument från unionens institutioner, organ och byråer i Förenade kungariket, tillämpningen av vissa artiklar i ECBS-stadgan avseende ECB och Förenade kungariket, samt tillämpningen av vissa privilegier och immunitet i förhållande till ECB, medlemmar i dess organ, dess anställda och företrädare för de nationella centralbankerna inom ECBS i Förenade kungariket.

text: 2. I enlighet med

text: artikel 50.2 i fördraget om Europeiska unionen

text: fastställer avtalet om utträde villkoren för Förenade kungarikets utträde ur unionen och Euratom, med beaktande av dess framtida förbindelser med unionen. Avtalet om de framtida förbindelserna mellan unionen och Förenade kungariket kommer att undertecknas först när Förenade kungariket har blivit ett tredjeland. I enlighet med artiklarna

text: och

text: FEUF och unionens rättspraxis, ska ECB höras om alla aspekter i avtalet om de framtida förbindelserna mellan unionen och Förenade kungariket som faller inom ECB:s behörighetsområde.

text: 3. Enligt avtalet om utträde inrättas en gemensam kommitté som ansvarar för att övervaka avtalets genomförande och tillämpning. Förslaget till beslut förtydligar att kommissionen ska företräda unionen i den gemensamma kommittén och i dess specialiserade kommittéer. I olika situationer som framgår av avtalet om utträde kommer den gemensamma kommittén att vara behörig att anta beslut som är bindande för unionen och Förenade kungariket, och unionen och Förenade kungariket måste genomföra dessa beslut. I enlighet med artiklarna

text: och

text: i FEUF och principen om lojalt samarbete som framgår av

text: artikel 13.2 i fördraget om Europeiska unionen

text: , ska ECB höras om sådana aspekter av den gemensamma kommitténs beslut som faller inom ECB:s behörighetsområde.

text: 4. Avtalet om utträde anger att vissa privilegier och viss immunitet som gäller i förhållandet till unionen även kommer att gälla i förhållande till ECB, medlemmar i dess organ, dess anställda och företrädare för de nationella centralbankerna inom ECBS som deltar i ECB:s verksamhet. I avtalet om utträde finns bestämmelser enligt vilka unionen måste informera eller underrätta Förenade kungariket om vissa apsekter av betydelse för sådana privilegier och sådan immunitet. I motiveringen till förslaget till beslut har kommissionen förtydligat att sådan information eller sådana underrättelser i första hand ska göras av kommissionen på unionens vägnar, vid behov på grundval av information som tillhandahållits av medlemsstaterna, andra institutioner eller unionens relevanta organ och byråer. ECB noterar detta förtydligande och är redo att ge kommissionen sådan information som ska överlämnas till Förenade kungariket.

text: Detta yttrande kommer att offentliggöras på ECB:s webbplats.

type: vagledning

utgivare: ecb


sprak: en

title: Opinion of the European Central Bank of 15 February 2019 on the licensing and supervision of providers of microcredit (CON/2019/7)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 15 February 2019 on the licensing and supervision of providers of microcredit (

text: ) Introduction and legal basis

text: On 18 December 2018 the European Central Bank (ECB) received a request from the Greek Ministry of Finance for an opinion on a draft Law on the provision of microcredit (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of

text: Article 2(1) of Council Decision 98/415/EC

text: , as the draft law relates to the Bank of Greece (BoG) and to the tasks conferred upon the ECB concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

text: 1. Purpose of the draft law

text: 1.1 The aim of the draft law is to lay down rules for the taking up, pursuit, and supervision of the activity of microcredit provision and to regulate certain rights and obligations of both providers and recipients of microcredit. The draft law defines microcredit as the provision of non-bank, unsecured loans not exceeding EUR 25,000 to individuals, socially vulnerable groups, and very small legal entities and/or ‘entities for the social and solidary economy’, to be used as working or investment capital, for educational purposes, or for social integration purposes. 1.2 The draft law designates the BoG as the competent authority to license and supervise entities providing microcredit in Greece. In particular, the BoG is empowered to: (a) assess licence applications, further specify the documentation required, and grant and withdraw, subject to certain conditions, the relevant licence; (b) conduct fit-and-proper assessments of natural or legal persons aiming to acquire qualifying holdings (or increase such holdings) in microcredit entities; (c) specify the detailed requirements concerning subscription to the initial capital of microcredit entities and set own funds requirements if deemed necessary; (d) maintain a register listing the microcredit entities licensed, or with passporting rights, to operate in Greece; (e) supervise microcredit entities in a way that is adequate, proportionate and responsive to their risk exposure, and issue decisions related to the levying of an annual supervision fee payable by each microcredit entity; and (f) impose penalties on microcredit entities in the event of infringement of the provisions of the draft law.

text: Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 1.3 The draft law also stipulates that credit institutions within the meaning of

text: Article 4(1)

text: (1) of

text: Regulation (EU) No. 575/2013

text: of the European Parliament and of the Council , and financial institutions, within the meaning of

text: Article 4(1)

text: (26) of that Regulation, may also provide microcredit the same conditions as licensed microcredit entities. It is noted that Parts 3 and 4 thereof (Articles

text: ) are to apply to credit institutions within the meaning of Union law. Accordingly the ECB understands that the provisions on licensing, acquisition of a qualifying holding in a microcredit institution, and withdrawal of a licence (see Articles 6-11 of the draft law) do not apply to credit institutions. 1.4 Moreover, the draft law confers on the General Secretariat of Commerce and Consumer Protection at the Ministry of Economy and Development the task of ensuring and monitoring effective compliance with several provisions of the draft law applicable to credit institutions (relating to consumer protection issues). 1.5 Finally, the draft law provides that, with a decision by the Minister of Finance and the Minister of Economy and Development (and any other competent Minister, as applicable), it is possible to set up microcredit provision programmes as established in the draft law, co-investing resources from microcredit institutions and the national or co-financed leg of the Programme of Public Investments. The same decision shall specify the potential beneficiaries, the kinds and the purpose of the provided microcredit products, the specific programme implementation terms, the procedure for the recovery of sums wrongly paid, as well as any other necessary implementation details.

text: 2. General observations

text: 2.1 By way of introduction, the ECB notes that the great majority of Member States do not have a dedicated regime for the regulation of the provision of microcredit. In these Member States, the provision of credit, including credit under terms similar to microcredit within the meaning of the draft law, is subject only to the regulatory regime governing the institutions that provide it (either credit institutions or non-bank entities). Unlike in the case of credit institutions, which are subject to the harmonised EU banking rules when providing credit for their own account, the regulatory approach to the provision of microcredit by non-banks differs across Member States. Absent a harmonised, EU-wide regime to govern the provision of microcredit by non-banks, the European Commission has established a European Code of Good Conduct for Microcredit Provision (the ‘Code’). The purpose of the Code is to lay down a set of standards in terms of management, governance, risk management, reporting, consumer and investor relations that are common to the EU microcredit sector, rather than to replace existing regulations applicable to microcredit providers, where such regulations exist. The Code is primarily designed to cover non-bank microcredit providers providing loans of up to EUR 25,000 to micro-entrepreneurs. The draft law contains several references to the Code, which appears to inform some of its provisions, including the proposed

text: Regulation (EU) No 575/2013

text: of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending

text: Regulation (EU) No 648/2012

text: (OJ L 176, 27.6.2013, p. 1).

text: 3 See Article 27 of the draft law.

text: 4 See European Commission, European Code of Good Conduct for Microcredit Provision (2013), p. 10, available at: https://ec.europa.eu/regional_policy/sources/thefunds/doc/code_bonne_conduite_en.pdf. statutory ceiling for microcredit loans. 2.2 The focus of the Code on non-bank microcredit providers is justified by the fundamental differences between them and credit institutions, as providers of credit. These differences can be summarised as follows. First, the acceptance of deposits or other repayable funds from the public, and the granting of loans on the basis of such deposits and funds, is a regulated activity under Union law and is reserved to credit institutions. This particular characteristic accounts for both the particular systemic importance of credit institutions and the application to them of the stringent prudential supervisory standards laid down by applicable Union law, including

text: Regulation (EU) No 575/2013

text: and Directive

text: of the European Parliament and of the Council . Second, despite the fact that in the EU there are other examples of special-purpose lenders which are – in some respects – treated as credit institutions, the sources of their funding typically differ from those of non-bank microcredit lenders, and they typically lend to different groups of borrowers. These fundamental differences are also countenanced by the draft law. Indeed, under the draft law, microcredit institutions do not fund their operations through the collection of deposits or other contributions akin to deposits and the terms of credit and categories of beneficiaries provided for in the draft law also differ fundamentally from those applicable in the case of credit institutions. Significantly, the Basel Committee on Banking Supervision (BCBS) has contemplated the provision of microcredit by legal entities or individuals engaged primarily in its extension, including ‘banks specialised in offering microcredit’. However, the ECB notes that the BCBS’s definition of ‘traditional microlending’ differs qualitatively from the draft law’s understanding of ‘microcredit’, in particular through the requirement for the beneficiaries of microlending to provide collateral. 2.3 The draft law opts to include credit institutions in its scope of application in a manner that might lead to unwelcome ambiguities in terms of its fundamental policy goals. If the primary aim of the draft law is to promote the development of the Greek microcredit sector by standardising the regulatory expectations placed on non-bank microcredit providers and introducing sociallymotivated terms of credit and categories of beneficiaries aligned with microcredit’s social mission, it is difficult to see how the licensing and, a fortiori, the prudential supervision of such non-bank microcredit providers can be conducted on the basis of rules that could resemble those applicable to credit institutions.

text: 5 Directive

text: of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive

text: and repealing Directives

text: and

text: (OJ L 176, 27.6.2013, p. 338).

text: 6 The reference is, for example, to Irish and Lithuanian credit unions, Latvian cooperative undertakings, and Polish cooperative savings and credit unions which, despite falling outside the scope of Directive

text: on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV) for prudential supervision purposes, are nonetheless deemed to fulfil the functional criteria of credit institutions and are to be treated as credit institutions, for example for the purposes of minimum reserves requirements (see, for example, ECB Opinion

text: , paragraph. 2.2.). Significantly, these lending institutions tend to fund their operations through the contributions of their members, who are, typically, the recipients of the loans granted, and their mission differs from that of microcredit providers which are vehicles through which to combat poverty and social or financial exclusion (see the Code, p. 22 (Introduction)). All ECB opinions are published on the ECB’s website at www.ecb.europa.eu.

text: 7 BCBS, ‘Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion’, September 2016, available at: https://www.bis.org/bcbs/publ/d383.pdf.

text: 8 Ibid., Annex E.

text: 9 The Code understands the ‘mission’ of microcredit providers as one to ‘combat poverty and social and financial exclusion’ (see the Code, p. 22 (Introduction)). 2.4 The fundamental differences between the economic role of credit institutions and microcredit providers, as defined in the draft law, the different risks to which each is exposed, and the different sources of funding for their activities, all militate in favour of a different regulatory and, in particular, supervisory treatment to take into account their specific characteristics. Moreover, the equal treatment, on a regulatory and/or supervisory footing, of non-bank and bank lending activities is inconsistent with the letter and the spirit of the Code, which was drafted with non-bank microcredit providers and their social mission in mind. The ECB would, therefore, in the context of the draft law, strongly advise against the inclusion of credit institutions within its scope of application, in order to avoid confusion about the draft law’s policy objectives and legal uncertainty in respect of which set of rules the fundamentally different activities of these entities would be subject to in Greece under the draft law. 2.5 On a separate note, paragraph 4 of this opinion assesses the proposed conferral, on the BoG, of the new tasks of licensing and supervision of microcredit institutions against the criteria for determining what constitutes a government task from the perspective of the monetary financing prohibition laid down in Article 123 of the Treaty.

text: 3. Prudential supervisory and financial stability considerations

text: 3.1 The draft law defines a microcredit institution as a legal entity that has obtained authorisation, in accordance with

text: Article 9

text: , to provide microcredit in Greece (Article 2(2) of the draft law). Credit institutions, therefore, do not appear to fall within the definition of microcredit institution, given that

text: Article 9

text: is included in Part 2 of the draft law, which does not apply to credit institutions. Consequently, it is understood that credit institutions could provide microcredit under their existing banking licence. 3.2 The draft law sets out the definitions of microcredit and business microcredit. Microcredit is defined as credits of funds of up to twenty-five thousand euros (EUR 25,000) that do not constitute a bank loan and are provided exclusively in accordance with the provisions of the present law (Article 2 of the draft law). However, business microcredit is defined to include all forms of credit up to the limit of twenty-five thousand euros (EUR 25,000) which are provided either in order to cover investment needs or as working capital. On the basis of this definition it appears that a loan granted by a credit institution, within the limits and on the conditions set out in the draft law, would qualify as a form of business microcredit and would be subject to the draft law. In this respect, it is also noted that the definition of business microcredit contains an open-ended list of activities that qualify as business microcredit; this creates legal uncertainty as to whether a loan granted by a credit institution would qualify as business microcredit and fall within the ambit of the draft law. 3.3 The draft law confers wide-ranging powers on the BoG with regard to microcredit institutions (see paragraph 1.2 of this opinion). However, the ECB notes that the draft law is silent on the details of the supervisory framework in which microcredit institutions would be expected to pursue their activities, as it merely refers to ‘adequate, proportionate, and responsive’ controls that the BoG, as

text: 10 Ιt is noted that of the limited number of Member States in which the provision of microcredit constitutes a regulated activity, only one has included credit institutions in the scope of the applicable national regime. the competent authority, would be expected to exercise at a future point in time. Moreover, in the absence of an express provision in the draft law, it is unclear whether the BoG would be empowered to exercise the powers conferred upon it with regard to the activity of business microcredit, where this activity is exercised by credit institutions. 3.4 Furthermore, the ECB notes that

text: Council Regulation (EU) No 1024/2013

text: confers exclusive tasks on the ECB concerning the prudential supervision of credit institutions with a view to contributing to their safety and soundness and in order to protect the stability of the financial system of the Union and each Member State. The ECB is responsible for the effective and consistent functioning of the Single Supervisory Mechanism (SSM) and exercises oversight over the SSM’s functioning, based on a distribution of responsibilities between the ECB and the national competent authorities, including the BoG. In this respect, it is of the utmost importance that the conferral of tasks on the BoG and the Ministry of Economy and Development with regard to microcredit institutions and/or the activity of providing business microfinance should be without prejudice to the tasks that the ECB and the BoG exercise for the purposes of the prudential supervision of credit institutions. By removing credit institutions from the scope of application of the draft law, legal certainty can be ensured concerning the distribution of competences between the NCAs and the ECB with regard to the supervision of credit institutions providing business microcredit. 3.5 By explicitly excluding from supervision other business activities that ‘microcredit institutions’ may pursue, in addition to the provision of microcredit, the draft law risks undermining the efficiency of the future supervision of microcredit institutions. In particular, by precluding the supervisor from monitoring the full range of the activities pursued by entities engaging in the provision of microcredits, and from detecting possible risks to the financial position of those entities arising from their other activities, the draft law falls short of creating an environment conducive to the protection of financial stability, while at the same time exposing the supervisor to risks of supervisory failure and to the attendant reputational risks. 3.6 The ECB also notes its concern that if credit institutions are included in the scope of application of 16 17 the draft law,

text: Article 30

text: could seriously interfere with their lending activity and capital adequacy, since it could result in imposing pressure on credit institutions to extend microcredit on terms dictated by the Minister of Economy and Development or by any other minister, rather than on the regular terms subject to which supervised credit institutions conduct their lending operations.

text: Council Regulation (EU) No 1024/2013 of 15 October 2013

text: conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).

text: 14 The proposed approach would also protect the ECB and SSM from any reputational risks arising from obstruction in the exercise of their supervisory mandate over credit institutions that extend credit up to the statutory limit of EUR 25,000.

text: 16 Article 30(1) of the draft law states that ‘[W]ith a decision by the Minister of Finance and the Minister of Economy and Development and any other competent Minister, as applicable, it is possible to set up microfinance provision programmes as established by the present law, co-investing resources from microcredit institutions and the national or co-financed leg of the Programme of Public Investments. The same decision shall specify the potential beneficiaries, the types and the purpose of the microfinance products provided, the specific programme implementation terms, the procedure for the recovery of sums wrongly paid, and any other necessary implementation details’.

text: 17 This is all the more so, considering the absence of capital provisions corresponding to microcredit as well as the possibility of such loans becoming non-performing within a short period of time.

text: 4. New tasks of the BoG

text: 4.1 The draft law designates the BoG as the authority responsible for both licensing and supervising entities that provide microcredit loans in Greece. The ECB underlines that a proposed conferral of new tasks on a national central bank (NCB) of the European System of Central Banks (ESCB) must be assessed against the criteria for determining what constitutes a government task from the perspective of the monetary financing prohibition laid down in Article 123 of the Treaty. 4.2 For the purposes of that prohibition,

text: Article 1(1)

text: (b)(ii) of

text: Council Regulation (EC) No 3603/93

text: defines ‘other type of credit facility’, inter alia, as ‘any financing of the public sector’s obligations visà-vis third parties’. To determine what constitutes ‘financing of the public sector’s obligations vis-àvis third parties’ – which can be interpreted as financing provided by an NCB outside the scope of its central bank tasks – it is necessary to assess whether a new task to be undertaken by that NCB is a government task. 4.3 As part of its discretion in the exercise of its duty, on the basis of

text: Article 271

text: (d) of the Treaty and Article 35.6 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), to ensure that NCBs honour the obligations laid down by the Treaty, the Governing Council has endorsed safeguards in the form of criteria for determining what may be seen as falling within the scope of a public sector’s obligation within the meaning of

text: Article 1(1)

text: (b)(ii) of

text: Regulation (EC) No 3603/93

text: or, in other words, what constitutes a government task as follows: First, central bank tasks are in particular those tasks that are related to the tasks that have been conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. These tasks are mainly defined in

text: Article 127(2)

text: , (5) and (6) and Article 128(1) of the Treaty, as well as

text: Article 22

text: and Article 25.1 of the Statute of the ESCB. Second, as Article 14.4 of the Statute of the ESCB allows NCBs to perform ‘other functions’, new tasks that are not related to tasks that have been conferred upon the ECB and the NCBs are not precluded per se. However, new tasks which are atypical of NCB tasks or which are clearly discharged on behalf of and in the exclusive interest of the government or of other public sector entities should be considered government tasks. Third, an important criterion for qualifying a new task as atypical of an NCB task or as being clearly discharged on behalf of and in the exclusive interest of the government or other public sector entities is the impact of the task on the institutional, financial and personal independence of that NCB. In particular, the following aspects should be taken into account: (a) whether the performance of the new task would create conflicts of interest with existing central bank tasks which are not adequately addressed and does not necessarily complement those existing central bank tasks. If a conflict of interest arises between existing

text: Council Regulation (EC) No 3603/93 of 13 December 1993

text: specifying definitions for the application of the prohibitions referred to in Articles

text: and

text: b(1) of the Treaty (OJ L 332, 31.12.1993, p. 1). and new tasks, sufficient safeguards to mitigate that conflict should be in place. The complementarity between a new task and the existing central bank tasks should be interpreted narrowly, so as to avoid leading to the creation of an indefinite chain of ancillary tasks. Such complementarity should also be examined in relation to the financing of those tasks; (b) whether without new financial resources the performance of the new task is disproportionate to the NCB’s financial or organisational capacity and may have a negative impact on the capacity to properly perform the existing central bank tasks; (c) whether the performance of the new task fits into the institutional set-up of the NCB in the light of central bank independence and accountability considerations; (d) whether the performance of the new task harbours substantial financial risks; (e) whether the performance of the new task exposes the members of the NCB decision-making bodies to political risks which are disproportionate and may also have an impact on their personal independence and, in particular, on the guarantee of term of office set out in Article 14.2 of the Statute of the ESCB. 4.4 On the basis of the criteria set out above, the following paragraphs assess whether the new tasks conferred upon the BoG constitute government tasks in the context of the monetary financing prohibition. 4.4.1 New tasks and the tasks conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB The licensing and supervision of ‘microcredit institutions’ is not expressly mentioned among any of the basic central banking tasks listed in

text: Article 127(2)

text: and (5) of the Treaty or otherwise conferred upon the NCBs by the Statute of the ESCB. Under Article 127(6) of the Treaty, the Council may confer specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions. In this respect, the Council has conferred tasks on the ECB relating to the prudential supervision of credit institutions, but these tasks do not expressly include the authorisation and supervision of microcredit institutions. To the extent that the draft law purports to regulate non-bank lending activities, this new task is not directly related to tasks conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. 4.4.2 Tasks which are atypical of NCB tasks The ECB notes that the great majority of Member States do not have a dedicated regime for the regulation of the provision of microcredit. However, there are three Member States where there is a dedicated regime for the regulation of this activity . In all three Member States the national authority responsible for the supervision of credit institutions – in two of these Member States the NCB – has been designated as the competent national authority for the licensing and supervision

text: 20 France: Article L. 511-6 (5) and Articles R. 518-57 to R. 518-62 of the Monetary and Financial Code and the Decree of 18 July 2012 on associations and foundations authorised to grants certain loans and adopted pursuant to Articles R. 518-59 and R. 518-62 of the Monetary and Financial Code; Italy: Articles 111 and 113 of Legislative decree no. 385/1993 (the Italian banking law); Portugal: Decree-Law No. 12/2010 of 19 February 2010 on microcredit financial companies; Order 1315/2010, of 28 December 2010 and Order 59/2011, of 31 January 2011. of microcredit institutions . In a fourth Member State, while there is no regulatory regime catering specifically for the provision of microcredit, financial institutions providing microcredit are regulated subject to the licensing and supervision of the national authority responsible for the supervision of credit institutions . It follows that the new tasks proposed to be conferred on the BoG in relation to the licensing and supervision of microcredit institutions is not atypical for a central bank in those Member States which have chosen to establish a dedicated regime for the regulation of the provision of microcredit. 4.4.3 Tasks clearly discharged on behalf of and in the exclusive interest of the government The ECB understands that the licensing and supervision of microcredit institutions is a necessary component of a scheme which aims to facilitate the access of beneficiaries to working or investment capital, or capital for educational/social integration purposes. Despite the fact that this particular financing scheme has a social orientation, these tasks need not necessarily be discharged on behalf of and in the exclusive interest of the government. 4.4.4 Extent to which performance of the new tasks creates conflicts of interest with existing central bank tasks The new tasks of licensing and supervision of microcredit institutions do not, in general terms, create conflicts of interest with existing central banking tasks. That said, the inherently social purpose of microcredit, namely, to help combat poverty and social and financial exclusion, militates in favour of a more accommodative regulatory and supervisory regime than that applicable to credit institutions or other non-bank lenders and could become a source of tension between, on the one hand, the new tasks that the draft law entrusts to the BoG and on the other, the BoG’s existing supervisory tasks in respect of credit institutions and other categories of financial institutions, where the emphasis of the BoG’s supervision is on the financial soundness of those institutions and its impact on the overall stability of the financial system. Therefore, the possibility cannot be excluded that the performance of these new tasks may lead to conflicts of interest with the existing tasks of the BoG. 4.4.5 Extent to which performance of the new tasks is disproportionate to the financial or organisational capacity of the BoG The principle of financial independence requires that Member States may not put their NCBs in a position where they have insufficient resources to carry out both their ESCB-related tasks and their national tasks from an operational and financial perspective. While the draft law requires that microcredit institutions reimburse the BoG for the costs incurred in the performance of its new tasks, it does not clearly address the financial impact of these new tasks on the BoG, specifically

text: 21 France: the Autorité de Contrôle Prudentiel et de Résolution is entrusted with the granting and withdrawal of the authorisation to exercise microcredit activities by non-profit associations and foundations that are recognized as being of public utility, and allowed, under certain conditions, to grant credits without having been authorised as a credit institution; Italy: the Banca d’Italia maintains the register of microcredit providers and supervises their compliance with applicable requirements; Portugal: Banco de Portugal is the national authority entrusted with the authorisation and supervision of microcredit financial companies.

text: 22 Malta: Financial Institutions Act (Chapter 376 of the Laws of Malta). The Malta Financial Services Authority assumes the authorisation and supervision of these microcredit providers.

text: 23 See the Code, p. 22 (Introduction). with regard to the envisaged provision of microcredit by credit institutions. Nor does the draft law consider the overall impact of those tasks on the BoG’s organisational capacity; this can be significant, given the broad base of small lenders in Greece and the envisaged maximum amount of lending per lender, which is not immaterial by Greek standards. The ECB invites the consulting authority to consider appropriate arrangements so that the reimbursement of the BoG by the microcredit institutions is commensurate with the financial impact of the new tasks on the BoG. 4.4.6 Extent to which performance of the new tasks fits into the institutional set-up of the BoG, in the light of central bank independence and accountability considerations The tasks conferred on the BoG under the draft law do not, on their face, appear to be incompatible with the BoG’s overall institutional set-up. However, it should be noted that the BoG generally performs its existing tasks under a clear legal framework. Insofar as the draft law contains many legal uncertainties, particularly from the prudential supervisory and financial stability perspectives (see paragraph 3 above), it is not guaranteed that the new tasks will fit smoothly into the institutional set-up of the BoG. The absence of clarity surrounding the precise scope and nature of the tasks proposed to be conferred on the BoG may raise accountability issues for the BoG if it should come to discharge these tasks. 4.4.7 Extent to which the performance of tasks harbours substantial financial risks The draft law does not contain any specific provision on liability in relation to the exercise of the BoG’s tasks under the draft law. The BoG could, thus, potentially be held liable for damages in accordance with the rules of Greek law on liability applicable to the BoG. 4.4.8 Extent to which performance of the new tasks exposes members of the decision-making bodies of the BoG to disproportionate political risks and impacts on their personal independence Taking into account the social purpose of microcredit lending and the challenges to which the implementation of the draft law may give rise, the possibility cannot be excluded that the BoG’s competent decision-making bodies will see their political exposure increase as a result of the BoG’s involvement in the licensing and supervision of microcredit providers. 4.5 Conclusion While the new tasks which the draft law seeks to confer on the BoG regarding the licensing and supervision of microcredit institutions are not among the tasks conferred on the ECB and the NCBs by the Treaty and the Statute of the ESCB, they are not atypical of the tasks of NCBs in those Member States which have chosen to regulate the activities of microcredit institutions. Moreover, as they need not necessarily be discharged on behalf of and in the exclusive interest of the government, the BoG’s new supervisory tasks in relation to microcredit institutions do not constitute government tasks. Nonetheless, the ECB notes that the performance of these new tasks may lead to conflicts of interest with the existing tasks of the BoG. Moreover, the ECB invites the consulting authority to consider appropriate arrangements so that the reimbursement of the BoG by microcredit institutions as envisaged in the draft law is commensurate with the financial impact of the new tasks on the BoG. Furthermore, the absence of clarity surrounding the precise scope and nature of the tasks proposed to be conferred on the BoG may make it challenging for the BoG to integrate these tasks into its existing institutional set-up.

text: 5. Conclusions

text: Τhe ECB advises the consulting authority to take into account the points raised in this Opinion when deciding whether to include credit institutions within the scope of application of the draft law, and whether to confer on the BoG the proposed new tasks with regard to microcredit providers. This opinion will be published on the ECB’s website. Done at Frankfurt am Main, 15 February 2019. [signed]

text: The President of the ECB

text: Mario DRAGHI


text: Council Decision 98/415/EC of 29 June 1998

text: on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 2 Proposed new Section 2A,, subsections 1, 5 and 6 of the 2013 Act, as set out in Section 3 of the draft law.

text: As defined in the proposed new Section 2A, subsection 9, as set out in Section 3 of the draft law.

text: Proposed new Section 2A, subsection 4, as set out in Section 3 of the draft law.

text: Proposed new Section 2A, subsection 3, as set out in Section 3 of the draft law. 8 Proposed new Section 2A, subsection 2, as set out in Section 3 of the draft law. 9 Launceston Property Finance Limited v Burke, [2017] IESC 62.

text: See paragraph 2.2.1 of Opinion

text: and paragraph 3.1 of Opinion

text: . All ECB opinions are published on the ECB’s website at www.ecb.europa.eu 11 European Commission, Post-Programme Surveillance Report. Ireland, Spring 2018, 6 July 2018, page 17. 12 See paragraph 2.2.3 of Opinion

text: and paragraph 2.2 of Opinion

text: . 13 See paragraphs 2.2 and 2.3 of Opinion

text: See the Council of the European Union’s press release of 11 July 2017 on the ‘Council conclusions on Action plan to 14 tackle non-performing loans in Europe’, available at: http://www.consilium.europa.eu/en/press/pressreleases/2017/07/11/conclusions-non-performing-loans/. See also Opinion

text: . 15 See, for example, Special features, Section B of the ECB’s November 2016 Financial Stability Review, available at: https://www.ecb.europa.eu/pub/pdf/other/sfbfinancialstabilityreview201611.en.pdf. 16 Pursuant to the proposed new Section 2A, subsection 3, point (a) of the 2013 Act, as set out in Section 3 of the draft law. 17 Following the amendments made to Part V of the Central Bank Act 1997 by the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018, the term ‘credit servicing’ in relation to a credit agreement is defined to include holding the legal title to credit granted under the credit agreement. 18 See Launceston Property Finance Limited v Burke, [2017] IESC 62 at paragraph 57. See also paragraph 2.4.1 of Opinion

text: and paragraph 2 of Opinion

title: Opinion of the European Central Bank of 18 February 2019 on court orders for possession of principal private residences (CON/2019/8)

text: OPINION OF THE EUROPEAN CENTRAL BANK of 18 February 2019 on court orders for possession of principal private residences (

text: ) Introduction and legal basis

text: On 14 January 2019 the European Central Bank (ECB) received a request from the Irish Department of Justice, Equality and Law Reform for an opinion on the Land and Conveyancing Law Reform (Amendment) Bill 2019 (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the sixth indent of

text: Article 2(1) of Council Decision 98/415/EC

text: , as the draft law relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets and the tasks conferred upon the ECB concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

text: 1. Purpose of the draft law

text: 1.1 The draft law amends the Land and Conveyancing Law Reform Act 2013 (hereinafter the ‘2013 Act’), to set out the range of matters which a court is obliged to take into account when deciding to grant an order for possession of land (hereinafter ‘possession order’) to a mortgagee (‘lender’) in respect of a the principal private residence of a mortgagor (‘borrower’). The stated objective of the draft law is to ensure that the repossession of a borrower’s principal private residence should remain an action of last resort, when all other possible remedies have failed. 1.2 The 2013 Act already specifies the matters that a court would have to take into account before granting an adjournment of proceedings for a possession order in respect of a borrower’s principal private residence, in order to enable the borrower to secure a Personal Insolvency Arrangement (PIA) under the Personal Insolvency Act 2012, as amended. 1.3 The draft law is designed to address cases where the borrower has not secured a PIA under the Personal Insolvency Act 2012, or where the PIA procedure has come to an end . The draft law provides that the court must take into account certain matters when considering whether to make or refuse to make a possession order, and may take these matters into account when considering

text: whether to make any other order it considers appropriate in the circumstances . 1.4 The first matter referred to in the draft law is whether the possession order would be proportionate in all the circumstances , having regard to matters such as the total amount that remains to be paid to the lender on foot of the mortgage or any associated loan agreement; the amount of arrears of payments due on foot of the mortgage; the advised market value of the principal private residence on the date on which proceedings were commenced; and where the lender is not the original lender, the advised market value of the principal private residence on the date on which the new lender acquired the mortgage . 1.5 The other matters referred to in the draft law include the circumstances of the borrower and his or her dependants; whether the lender has made a statement to the borrower of the terms on which it would be prepared to settle the matter in such a way that would allow the borrower and his or her dependants to remain in their principal private residence; details of any proposal put forward by, or on behalf of, the borrower to enable them to remain in the principal private residence, including through participation in a scheme designed to assist persons in mortgage distress, or to secure alternative accommodation; the response, if any, of the lender to any proposal of the borrower; and the conduct of the parties to the mortgage in any attempt to find a resolution to the issue of dealing with arrears of mortgage payments . The court may also take into account such additional matters as it considers appropriate .

text: 2. Observations

text: 2.1 Interaction with the existing national framework The ECB takes note of the clarifications provided in the draft law on the matters that must be taken into account by the courts when deciding to grant a possession order to a lender in respect of a borrower’s principal private residence. The ECB understands that the matters listed in the draft law partly reflect the case law of the Irish Supreme Court on this topic, and the Code of Conduct on Mortgage Arrears, introduced by the Central Bank of Ireland (CBI) in 2013, while the draft law also expressly sets out the range of matters which a court is obliged to take into account when considering whether to make or refuse a possession order. 2.2 Effects on the banking sector and on financial stability 2.2.1 In the context of its direct responsibility for the supervision of significant banking groups within the euro area, the ECB closely monitors the stability of credit institutions. The high level of nonperforming loans (NPLs) in Ireland has brought large credit losses to Irish banks in the recent past. Thus, it is important that NPLs are dealt with in an efficient and effective manner, balancing the need to ensure, on the one hand, observance of the general duty of debtors to meet their payment

text: obligations and, on the other hand, the need to provide assistance to individuals in dire financial situations . 2.2.2 On the one hand, the draft law adds to the existing protections and procedures for distressed borrowers under the CBI’s Code of Conduct on Mortgage Arrears 2013, the CBI’s Consumer Protection Code 2012, the Land and Conveyancing Law Reform Act 2009, the Land and Conveyancing Law Reform Act 2013 and the Personal Insolvency Act 2012. The draft law will ensure that where these existing avenues have been exhausted, and the lender applies to the court for a possession order, the borrower will have a further opportunity for matters, including his or her personal circumstances, and his or her proposals in respect of the mortgage, to be taken into account. The draft law does not specify what significance or relative weight a court should assign to the matters that must be taken into account in making or refusing to make a possession order. 2.2.3 On the other hand, long-term mortgage arrears are considered to be the most critical part of the NPL stock in the Irish banking sector. Repossession activity remains relatively limited, and the length of proceedings continues to be protracted . The various matters which the draft law requires the court to take into account are likely to result in lengthy submissions and may provide additional grounds for appeal, particularly given the uncertainty regarding the significance and relative weight of some of the matters the court must take into account. Thus, it is important to consider the likelihood that the draft law will exacerbate the protracted nature of proceedings, and increase the associated legal costs, including for distressed borrowers. The negative impact of protracted proceedings on lenders, particularly in respect of the contemporaneous value of a borrower’s collateral and in respect of secondary markets for credit institution assets, should also be considered. 2.2.4 The ECB underlines that the ability of financial institutions to effectively manage credit risk depends on a reliable, predictable and stable legal framework that adequately balances the interests of both the creditor and the debtor. In this respect, it is important to carefully consider the impact of the draft law in order to ensure legal certainty, and to prevent moral hazard from arising in the relationship between creditor and debtor . If banks (or secondary market purchasers of assets) are deprived of efficient tools to work out NPLs in an effective and timely manner, this could result in unnecessarily high levels of NPLs and private sector debt, which in turn have an adverse impact on financial stability and could undermine future credit supply . Moreover, when pricing mortgages, banks take account of many factors, including the actual and future cost of funding, expenses and overheads, the cost of capital, and expected credit losses. The impact of the draft law on these factors, and in particular on the ability of the lender to enforce security and the potential corresponding increase in default rates, should also be carefully considered. This is because additional costs are likely to be passed on to future borrowers, and could result in a significant impact on mortgage pricing and availability.

text: 2.3 Effects on secondary markets for credit institution assets 2.3.1 The ECB has been a strong proponent of the development of secondary markets for credit institution assets, particularly NPLs, as reflected in the EU Council’s action plan to tackle NPLs in Europe . In the context of the large stocks of NPLs that remain on the balance sheet of some European credit institutions, and as part of a comprehensive solution to NPL resolution , the development of secondary markets may contribute to reducing NPLs. Looking ahead, wellfunctioning secondary markets may also prevent stocks of NPLs building up in the future. 2.3.2 Moreover, a well-functioning secondary market for bank assets may have a positive effect on financial stability to the extent that it could facilitate the transfer of the risks of NPLs off credit institutions’ balance sheets. The presence of significant volumes of NPLs on credit institutions’ balance sheets reduces their ability to fulfil their function as providers of credit to the real economy and hampers the operational flexibility and overall profitability that are essential to a wellfunctioning banking sector. It is essential that the national legal framework applicable to secondary markets enables the efficient transfer of NPLs off the balance sheet of credit institutions. 2.3.3 The ECB notes that in the context of the court’s consideration of whether the possession order would be proportionate in all the circumstances , the inclusion of one particular matter in the draft law would merit further reflection by the legislators. That is, where the lender is not the original lender, the court may have regard to the advised market value of the principal private residence at the date on which the new lender acquired the mortgage. In that respect, the ECB notes that borrowers will benefit from the CBI’s Code of Conduct on Mortgage Arrears 2013, the Consumer Protection Code 2012, and Part V of the Central Bank Act 1997, as amended by the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 and the Consumer Protection (Regulation of Credit Servicing Firms) Act 2018, which provides for the regulation of credit servicing . These protections apply regardless of whether the mortgage is owned or serviced by the original lender, or by a credit servicing firm . The ECB would welcome further clarity in respect of how consideration of this matter would assist the court in its proportionality assessment, in light of the objective of the draft law to ensure that the repossession of a borrower’s principal private residence remains an action of last resort. The draft law should also consider how issues of adverse selection may be avoided. While lenders remain responsible for prudently assessing collateral values, it is important to maintain sufficient incentives for repayment and effective safeguards to prevent strategic defaults. 2.3.4 In this context, the draft law must carefully balance the benefits of creating well-functioning secondary markets against the impetus to protect borrowers. The provision of the draft law

text: whereby the court may take into account the advised market value of the principal private residence at the date on which an investor acquired the mortgage may be perceived as placing investors at a disadvantage, as it is unclear what significance a court should assign to this information in its decision. This could impede investors’ participation in secondary markets, thereby reducing overall participation and reducing price competition in the market place. Even if the provisions of the draft law do not result in reduced participation by investors, investors may pass the costs associated with such a perceived disadvantage onto the credit institutions selling the assets. As such, risks to financial stability may emerge either as a result of a failure to develop secondary markets or because prices in those markets are subdued by regulatory costs. 2.3.5 While risk transfer through asset sales, securitisation and other measures may be effective in reducing NPLs, risk reduction measures remain, nevertheless, an important channel, particularly in a context where NPL stocks are high. In that regard, and in the context of a comprehensive solution to NPL resolution, the originating credit institutions’ internal procedures for handling the work-out of NPLs themselves will remain important.

text: This opinion will be published on the ECB’s website.

text: Done at Frankfurt am Main, 18 February 2019.

text: [signed]

text: The President of the ECB

text: Mario DRAGHI