Italy’s implementation of EU SMD on track for September as industry consolidation gathers momentum
Implementation of the EU Secondary Market Directive (SMD) into national law in Italy is on track to secure House and Senate approval later in July, with subsequent adoption by the Bank of Italy (BoI) by September. This revised timeline reflects a nine-month delay from the original 29 December deadline, with an additional six-month transition period for servicers to adapt to the new regime. Delays are due to the complexity and controversy surrounding the Directive, which faced pushback from servicers and purchasers adversely impacted by the new rules.
For a full summary of the purpose of the EU Directive, please review our article published last November. In essence, the EU-wide regulatory regime aims to harmonise rules for the sale, purchase, and servicing of non-performing loans (NPLs) originated by EU banks. These measures are designed to foster a competitive and efficient secondary market for NPLs, improve risk management and transparency, enhance cross-border NPL trading, and reduce the burden of NPLs on bank balance sheets while protecting borrowers, particularly consumers.
Background
On 29 February, Italy’s Ministry of Economic and Finance (MEF) held a public consultation on proposals to implement the Directive. The MEF’s proposal stipulates that the SMD applies to the servicing of NPLs (sofferenza) that are not collateral in securitisations, but does not apply to UTP loans, NPLs from non-EU banks, performing loans, or loans from entities not authorised to grant financing.
The Directive applies to all Italian special servicers, expanding BoI’s regulatory remit in NPL servicing. The BoI will require authorised servicers to provide information on organisational structures, corporate governance, internal controls, accounting policies, and borrower safeguard measures. The extent and timing of these changes depend on the BoI’s final guidelines. Some Italian servicers may limit compliance costs by focusing on the UTP market, reducing their NPL assets under management. “We believe that increased BoI regulation of special servicers could lead [to] improving governance frameworks. However, such changes will come at a cost, which could affect servicers’ profitability,” wrote Fitch Ratings in mid-March. Critics warn that new rules, combined with existing financial restrictions in Italy, could hinder the development of the secondary NPL market by adding red tape that undermines the objective of a harmonised regulatory framework.
Key concerns include:
- NPL purchasers assuming contracts linked to original loans, potentially conflicting with existing legal frameworks.
- NPL purchasers being required to appoint BoI-registered servicers, without explicit parameters for outsourcing functions, potentially leading to inefficiencies and conflicts with debtor protection provisions.
- Additional communication steps mandated for banks, financial intermediaries, or servicers to inform debtors about their debt status, complicating debt assignment processes and increasing administrative burdens on creditors.
- The requirement for NPL servicers to separate funds paid by debtors, creating complexities regarding creditor rights and operational implications for servicers and purchasers.
- Cross-border compliance creating regulatory complexities and administrative burdens for non-EU purchasers, potentially stifling transactions.
doValue’s Gardant acquisition leads consolidation wave
The Directive will serve to reorganise the country’s servicing sector by expanding BoI oversight, improving operating standards and corporate governance frameworks, and likely increasing compliance costs. “The implementation of the EU SMD in Italy could accelerate an existing consolidation trend already underway within the European servicing sector,” explains Timur Peters, CEO and founder of Debitos. “Consolidation in the servicing sector will help protect business volumes, with the remaining enlarged players benefiting from scale and digitalised workflows.”
In early June, doValue, the largest manager of credit portfolios and real estate NPLs in Southern Europe, entered a binding agreement to acquire 100% of Elliott Investment Management’s majority-owned Gardant servicing unit. Fortress and Bain Capital, also Gardant shareholders, will become anchor doValue shareholders under the cash-and-stock acquisition. This move will enhance doValue’s market share in asset-light loan servicing across Southern Europe, the Hellenic region, and Italy. Gardant, a leading end-to-end credit management platform, handles performing loans, UTPs, NPLs, master and special servicing, and asset management.
The transaction will reinforce doValue’s position as the largest debt servicer in Italy, boost profitability, and accelerate diversification from NPLs to unlikely-to-pay (UTP) loans, significantly expanding its operations, according to S&P Global. Gardant’s joint ventures with Banco BPM and BPER will provide substantial NPL inflows and guaranteed UTP volumes, further strengthening doValue’s market position. Further consolidation in the sector is likely in 2024, according to Fitch Ratings.
About Debitos
Debitos is the leading loan transaction platform in Europe that enables banks, funds and companies to sell their credit exposures on the market through its open and transparent auction-based online transaction platform.
The platform leverages on the digitalization of the entire sale process and can reduce the expected disposal timing to 3-8 weeks compared to 3-6 months of the traditional process. Debitos was founded in Frankfurt in 2010 and has since successfully transacted more than €10 billion in transactions. By now, more than 2,000 investors from all over Europe have registered with Debitos.
James Wallace is an editor, journalist, researcher and corporate writer on economics, geopolitics, finance, real estate, private equity, aviation, infrastructure and technology. He co-founded CoStar News in the UK in April 2011, and now works for multiple media organisations and corporations across writing, research, marketing/PR and consulting. He is an aspiring psychologist.
(Image rights: https://www.istockphoto.com/de/portfolio/SeanPavonePhoto)