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The European Banking Authority (EBA) has fed back to the European Commission on how best it can respond to the rise of non-bank actors in the lending space, which could result in new compliance rules for bigtechs and fintech services.
Although the provision of innovative financial services may bring benefits for consumers and increase competition in the market, the EBA’s analysis has found that regulatory regimes currently in place indicate that non-bank lending remains largely unharmonised across the EU and this may create challenges for all stakeholders, including national regulators.
The magnitude of non-bank lending in the EU remains limited compared with credit provided by banks; however, fintech activity has increased in recent years, the EBA noted in a report sent to the European Commission.
Meanwhile, trends observed outside the EU also show that bigtech companies and other non-traditional operators have already developed and successfully rolled out business models for lending.
The report includes a specific annexe for payments and electronic money institutions, which the EBA said “deserve specific attention”.
This is especially relevant for the role played by bigtech firms, which often enter financial markets through the provision of payment services, which are functional to their "core" activities (such as e-commerce or advertising) and can entail the provision of credit as an ancillary service to the provision of payment services.
This can allow them to transition to the provision of other financial services, including lending, more easily. For example, the revised Payment Services Directive (PSD2) allows payments institutions to provide ancillary lending services.
This is an area that the EBA’s report says is predominantly unregulated and certainly unharmonised.
In the majority of jurisdictions, no additional prudential requirements are anticipated for ancillary credit.
In one member state, institutions are required to provide more documentation on creditworthiness assessment, while in another jurisdiction, according to the EBA, additional requirements are asked for from small institutions only, although they were not specified.
When additional requirements are asked for, the EBA found only one case in which capital adequacy provisions were required — in this case, 6 percent of ancillary loans were granted.
Although in another jurisdiction, it is decided on a case-by-case basis. For example, the authority explained that if a payment institution (PI) or e-money institution (EMI) is engaged in continuous credit granting, it will be subject to a capital requirement.
The EBA’s research also explored whether competent authorities have visibility on cross-border activities carried out by PIs in their jurisdictions, either as a home or host institution, with most authorities claiming that they do not have information on PIs and EMIs that are carrying out ancillary lending in other member states.
Improvements needed
In its report, which was addressed to the commission’s financial director-general, John Berrigan, the EBA has proposed improvements to enhance consumer protection, anti-money laundering/counter-terrorist financing (AML/CTF), and monitoring and reporting frameworks.
To protect consumers, the EBA has proposed harmonising and strengthening the Consumer Credit Directive (CCD) and Mortgage Credit Directive. This is something already foreseen in the CCD review being undertaken by the commission.
“This harmonisation of authorisation requirements for entities providing consumer loans and entities providing mortgages is a welcome development,” the report says.
It could help strengthen the requirements for authorisation and registration, and execution of compliance to close any gaps in the activity-based requirements.
Therefore, facilitating more intense supervisory scrutiny over activities of non-bank lenders that currently may not be subject to sufficient entity-based oversight.
The EBA also backed enhancing creditworthiness assessments, ensuring they are conducted in the interests of consumers.
It has proposed that non-bank lenders should be covered in a more comprehensive way by the EU’s AML/CTF regime to “guard against uneven approaches, regulatory arbitrage and associated gaps in the EU’s AML/CFT defences”.
The European Commission has gone some way towards this reform in the Anti-Money Laundering Regulation.
Nevertheless, the commission should give more consideration to putting credit intermediaries into scope, the EBA recommended.
The EBA has advised that it cooperates with prudential supervisors when approving applications for authorisations from non-bank lenders and throughout the cycle of supervisory activities. Improvements are also needed to better understand money laundering/terrorism financing risks associated with non-bank lenders and to keep abreast of changes in this sector.
Enhancing the monitoring and reporting frameworks to avoid any sudden increase in macroprudential risks remains unaddressed by the EU’s supervisors.
Meanwhile, the introduction of activity-based macro-prudential measures to cover all credit providers has also been suggested by the EBA.
