The European Banking Authority (EBA) has warned that the largely unharmonized regulatory regimes across Europe regarding non-bank lending may create challenges for stakeholders, including regulators, and it recommended changes that may affect lending solutions like buy now pay later (BNPL) and peer-to-peer (P2P) platforms.
In a report published May 4 in response to a European Commission´s call for advice, the EBA identified the risks related to the provision of credit by non-bank lenders and put forward some proposals to address them. The EBA´s proposals focus on four areas: supervision, consumer protection, anti-money laundering (AML) and macroprudential risks.
“While the magnitude of non-bank lending in the EU remains limited compared to credit provided by banks, FinTech activity has been increasing over the last years. The trends observed outside the EU also show that BigTechs and other non-traditional operators have already developed, and successfully rolled out, business models for lending,” said the EBA in its report. The report includes the analysis of Big Tech and FinTech lending as well as different formats of crypto-asset lending, including in decentralized ledger (DLT).
In the area of consumer protection, one of the first warnings from the EBA is that the current legislation, the Consumer Credit Directive (CDD), foresees a number of exemptions for amounts smaller than EUR 200 or for credits that are provided free of interest and without any other charges. This would exclude many BNPL providers. The European Commission has proposed a new CCD and removed the exclusion. The EBA recommended retaining this proposal from the Commission to cover the entities currently outside its scope, like BNPL providers.
Second, the EBA proposes to enhance companies´ disclosure requirements to ensure that they are fair, effective and well-suited to new forms of lending. While the current legislation already includes provisions on advertising requirements and pre-contractual information, the regulator believes that the use of distance marketing may negatively impact the customer’s understanding of the credit products and more is needed in this area. Third, the regulator suggests strengthening the requirements for creditworthiness assessment, although the Commission’s proposal in the new CCD largely addressed these concerns already.
Another area of increasing interest for banking regulators, and the EBA is no exception, relates to anti-money laundering (AML) risks. According to the regulator, not all providers of the activities explored in the report fall under EU AML rules. Therefore, these providers do not need to be authorized or licensed unless they are authorized or licensed as a result of their wider financial activities or are covered by national rules. When no licensing regime is in place for certain non-bank lending activities, these may not be subject to AML requirements. To close this regulatory gap, the EBA proposes to cover all non-bank lenders throughout the EU-wide AML framework, to ensure greater harmonization and that such entities are captured as “obliged entities.”
In the area of supervision, the regulator wants to strengthen the provisions in terms of authorization and admission to activities to allow effective oversight as some non-bank lenders that are not subject to any entity-specific requirements may not be adequately supervised. The EBA also wants to clarify the supervisory responsibilities between the home and the host authority in the cross-border provision of services.
The EBA´s report contains non-binding recommendations for the European Commission, who may take them into consideration when reviewing other regulations or proposing new rules if necessary. According to the EBA, some of these recommendations may be addressed in the proposed Consumer Credit Directive, which is currently under debate in the EU Parliament.