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Introduction
Salary-backed loans or pension-backed loans ("CQS/CQP") [1] – originally regulated by Presidential Decree No. 180 of 5 January 1950 – have been, over time, the subject-matter of numerous supervisory guidelines and actions by the Bank of Italy [2], mostly aimed at preventing improper conduct on the part of banks and financial intermediaries pursuant to Article 106 of Legislative Decree No. 385 of 1 September 1993 (Consolidated Banking Act, "TUB") and at ensuring fairness of conduct towards customers.
This is also due to the fact that such form of loan has for some time been an important source of funding for segments of customers experiencing financial fragility or difficulty in accessing credit, ultimately becoming an important instrument of financial inclusion.
Given the operators' growing interest in this type of product - also due to the more favourable weighting factors applicable as a result of the amendments introduced to CRR2 by Regulation (EU) 873/2020 [3] – the Bank of Italy, in its Communication of 12 January 2022 [4], decided to focus the attention of banks and financial intermediaries on the need to adequately assess the risks associated with CQS/CQP financing transactions, and on compliance with the rules on transparency and fairness in customer relations ("Communication") [5].
The significant increase in market demand for CQS/CQP loans has been accompanied by the spread of opportunistic behaviour of some operators in the sector, who have been encouraged to provide credit without paying particular attention to the real financial needs of their customers [6].
Notwithstanding the fact that the recent intervention is fully within the scope of the previous supervisory guidelines - from which market operators can still take indications on conduct and practices considered by the Authority to be in compliance with the regulatory framework in force - it is worth dwelling briefly on the principal contents of the Communication, as they will lead to an intensified supervision (with both on-site and off-site inspections) by the Bank of Italy on those supervised entities active in the CQS/CQP sector, in order to check "that effective safeguards are in place to protect against all the risks associated with this form of lending and .... that market practices comply with the regulatory frame of reference”.
The Communication
The first issue raised in the Communication concerns the need for lending to be preceded by an accurate and careful assessment of the potential borrower's credit risk [7].
Indeed, the reduction in the prudential weighting factor must not induce the lender - with a heterogenesis of ends similar to that found in the past with respect to omnibus guarantees - to assess only the financial position of the employer, who has the direct burden of repaying the loan instalments.
Said aspect becomes even more relevant when one considers the need - emphasised by the Bank of Italy - to prevent the risks of over-indebtedness of potential customers, also in the light of the possible consequences in terms of debt relief and restructuring in the event of a crisis resulting from over-indebtedness [8].
The special characteristics connected to the marketing and management of CQS/CQP loans require, moreover, an appropriate protection against operational risks incumbent on financial intermediaries, due, inter alia, to the need for:
Specific legal and reputational risk profiles are typically associated with the use of external networks of agents, brokers and other financial intermediaries authorised to distribute the product to the public, in order to adequately monitor any breaches of rules or improper conduct of the network.
Particular attention should also be paid to the definition of internal rules on remuneration and incentives so as not to encourage, directly or indirectly, the placement of products that are inconsistent with the economic and financial situation of customers [10].
Finally - also taking into account the constant development of the credit process through IT platforms - the Communication draws the attention of banks and financial intermediaries to the compliance risks associated with the use of digitalisation processes in the relationship with customers (increasingly accelerated by the current pandemic), both in the phase of onboarding customers and in the phase of disbursing amounts and managing the relationship with them.
This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For any further information please contact Danilo Quattrocchi.
[1] As is well known, the aforementioned transactions are typical forms of credit granted to (public or private) employees and pensioners, with a maximum duration of ten years and the amount of the repayment instalment not exceeding one fifth of the net monthly salary (or pension), which is withheld by the employer (or pension body) and paid directly by the latter to the financial institution on the basis of a mechanism similar to the delegation of payment. A further peculiarity of the institution is the requirement for credit guarantees, in the form of insurance policies to cover the risk of premature death and job loss of the borrower.
[2] Reference is made in particular to the Bank of Italy's communications of 19 November 2009, 7 April 2011 and, more recently, Resolution 145/2018, setting out “Salary and pension-backed loans supervisory guidelines”.
[3] So-called “CRR Quick-fix”, which, on the basis of the lower credit risk connected with the peculiarities of the institution, reduced the weighting factor applicable to such form of loan in terms of capital absorption from 75% to 35%.
[4] Available on www.dirittobancario.it/wp-content/uploads/2022/01/Comunicazione-Banca-dItalia-12-gennaio-2021.pdf and on www.bancaditalia.it/compiti/vigilanza/normativa/archivio-norme/comunicazioni/com-20220112/op-finanziamento-contro-CQSP.pdf.
[5] See, in particular, Title VI of the TUB and the Bank of Italy’s Order of 29 July 2009 on “Transparency of banking and financial transactions and fairness in the relations between financial intermediaries and customers”.
[6] In the communication accompanying the aforementioned Resolution 145/2018, the Authority notes that in 2017 there were almost 22,000 appeals to the Banking and Financial Arbitrator on the subject of CQS/CQP, an increase of over 40% compared to the previous year and such as to represent 72% of the litigation brought before the Arbitrator.
[7] In Section I of the Supervisory Guidelines on the transfer of salary- and pension-backed loans issued by the Bank of Italy in 2018, the Authority for example specifies that “it is good practice to also consider, while respecting privacy, the household' s condition, in cases where it is relevant to assessing the reliability of the debtor and the sustainability of the debt”.
[8] See Decree Law No. 137 of 28 October 2020 (so-called “Ristori Decree”), converted with amendments into Law No. 176 of 18 December 2020.
[9] The above-mentioned requirements seem even more evident with reference to the so-called "originate-to-distribute" business models, in which the disbursing intermediary (typically a subject under Article 106 TUB) periodically and systematically transfers without recourse to third parties the CQS/CQP loans granted to its customers. Indeed, in such cases, although the originator/assignor often retains responsibility for the management of collections and any early repayments, the fulfilment of periodic reporting obligations to customers and the management of any complaints, the acquiring intermediary must adopt suitable systems to control the work of the originator, also through suitable information flows and periodic and structured checks. In this respect, the due diligence carried out by the purchaser should not be limited to examining the credit risk inherent in the portfolio being acquired but should also extend to the legal and reputational risks connected with the originator' s work. In this regard, see also Section IX of the Supervisory Guidelines on salary- or pension-backed loans issued by the Bank of Italy in 2018. Again with reference to "originate-to-distribute" models, the Authority also draws attention to the need to guarantee an effective management of the liquidity and market risks that might arise to assigning intermediaries from: a) any difficulty with transferring their portfolios to third parties, for example, in the event of contingent adverse market situations; b) sale of the receivables at prices lower than the current market value.
[10] In this respect, the Communication first refer to Section VII of the Supervisory Guidelines on salary- and pension-backed loans issued by the Bank of Italy in 2018, but the provisions on “Product oversight and governance procedures” contained in Section XI, paragraph 1-bis of the Bank of Italy’s Order of 29 July 2009 on “Transparency of banking and financial transactions and fairness in the relations between financial intermediaries and customers”.
