Despite the majority of EU jurisdictions having either transposed (or at least produced drafts of legislation transposing) CRD VI third country branch requirements, ambiguities around the regulatory perimeter for cross border banking services still remain. In particular, there are several fundamental questions remaining around the extent to which non-EU banks can rely on exemptions from having to establish an EU credit institution or branch.

Much of the focus has been on how the scope of the available exemptions will be interpreted (particularly the Reverse Solicitation, MiFID and Grandfathering Exemptions) and what they will permit. (See here for our earlier article on the full range of exemptions, including the all-important inter-bank and intra-group exemptions). We are seeing an eagerness by non-EU banks to probe the reliability of those exemptions – especially as they can be interpreted differently in different jurisdictions – and to ensure that their policies and record keeping procedures will withstand regulatory scrutiny.

However, some uncertainty still remains around the scope of the regime itself: namely, what amounts to “lending” for the purposes of CRD VI.

In the primary lending market – this is fairly identifiable. It would be the party extending credit in the first instance. Where the creditor is a bank from outside the EU, the loan would need to fall within the parameters of the available exemptions or be restructured through different entities. However, when a loan is purchased or otherwise acquired from the original lender – the issue of whether the buyer is "lending" becomes less certain.

Clearly loans that permit further drawdowns could involve the purchaser of those loans being subject to further obligations to lend. When that purchaser is a deposit taker (or would meet the legislative definition of a credit institution if it were based in the EU), lending to an EU borrower could only be permitted if that lending falls within an exemption.

However, in the case of a fully drawn down loan the picture becomes less clear. While risk participations between EU and non-EU banks that don’t result in the non-EU bank having direct contractual exposure to the borrower would have the benefit of the inter-bank exemption, that is not necessarily the case where the non-EU bank purchases a loan outright. Even if they are not on the hook for future lending, they have become the "lender of record" – they have acquired legal title to the loan, stepped into the shoes of the lender, are taking the credit risk on the borrower, have the right to exercise all the rights of the original creditor, and (presumably) need to treat these purchases as credit exposures for capital purposes just as they would if they had made the loan themselves. To understand whether this could amount to lending, purchasers will need to consider the national approach to interpretation, alongside any relevant EBA or Commission interpretations.

In certain jurisdictions (e.g. Ireland) – the activity of lending to consumers is separated from the activity of exercising the rights as lender under consumer loans. This is intended to ensure that purchasers of such loans are either authorised or have ensured that the loan is serviced by an authorised servicer. While the activities are only regulated when it comes to consumer borrowers, this distinction is helpful in supporting an argument that simply being the lender of record wouldn’t involve you in the activity of lending per se unless you were also the original creditor. The activities are separate.

Where there is no distinction in local law, the issue is less certain – but, you would have to argue that the purchase or acquisition of a loan is not "lending" (regardless of what you end up being called and what you can do under the terms of the loan) rather it is purchasing a receivable. As a minimum, this should not automatically be regarded as equivalent to lending.

From a policy perspective, this would make sense:

• Bank-lending in Europe is restricted to EU banks in the first instance subject to EU supervision and conduct requirements. However, liquidity from outside the EU is available to those lenders enabling them to make more loans to EU borrowers whilst moving credit risk off their balance sheets. Restricting third country banks' ability to participate in secondary loan markets could reduce market liquidity, impair risk transfer and limit the efficient allocation of credit within the EU economy.
• It is also consistent with the underlying rationale underpinning the reverse solicitation approach – CRD VI should not impact the freedom that EU borrowers have in being able to access overseas banks where they want to. This acknowledges that the risks posed by banks outside the EU are context specific.

And yet – there is still legal uncertainty:

• There is no express pan European definition of what lending is – the CRD wording is that it includes including inter alia: consumer credit, credit agreements relating to immovable property, factoring, with or without recourse, financing of commercial transactions (including forfeiting). This is not an exclusive list and can be (and has been) supplemented by national approaches to transposition and EBA or Commission interpretations.
• Non-EU banks may have formed a view on the extent to which certain loans may be regulated or not in a jurisdiction in which they seek to acquire such loans, but not whether such activity (where unregulated locally) itself amounts to lending for the purposes of CRD VI.
• From the borrower's perspective where a purchaser becomes the lender of record, they become lender to all extents and purposes.
• Origination-and-flow arrangements would be a fairly obvious way for overseas banks to simply continue lending into Europe without tripping over the Article 21c prohibition (the purchaser would simply tell the lender what loans it would be prepared to buy).

Recent LMA materials made clear its view that the purchase of receivables is not lending. However, it also notes that as regards "novations and assignments of fully drawn loans, while the purchaser would become lender of record, the purchaser would not be providing a commitment or extension of credit to the borrower. The asset is purely a receivable from the perspective of the lender. Most Member States treat a transfer of a fully drawn loan as not amounting to lending and we expect this view to be generally accepted."

This would certainly appear to be the simplest approach to take – and it is helpful that the LMA has proffered this view. However quite often we see divergence between Member States as to how different activities are treated (and even where they are deemed to take place).

• In Germany (for example) financial leasing (CRD service 3), and in France, financial leasing and cheque services (CRD service 5) are considered to comprise Core Banking Services which will be subject to the prohibition.
• With specific reference to the secondary loan market, in its supervisory guidance on lending business (Hinweise zum Tatbestand des Kreditgeschäfts), BaFin has taken the view that a person who acquires loan claims and thereby assumes the position of lender may, depending on the structure and economic substance of the transaction, be regarded as carrying on lending business requiring authorisation depending on the substance of what the purchaser does after the acquisition (extending maturity (prolongation), increasing exposure, granting payment deferrals, or otherwise exercising discretion that amounts to new credit underwriting can qualify as lending).
• In contrast, under Article 106 of the Italian Banking Act (TUB), carrying on the activity of “granting financing in any form” to the public is reserved to authorised banks and financial intermediaries. The implementing regulation, Ministerial Decree No. 53/2015, expressly includes the purchase of receivables for consideration within that concept. Accordingly, a person regularly purchasing loans or receivables from Italian debtors may be regarded as conducting regulated financing activity, even though it did not originate the loans.

Separately, the Commission issued guidance in 2021 on the extent to which purchasing receivables could qualify as "granting credits" in the context of the definition of a "credit institution" (per Article 4(1)(1) of CRR). This suggested that the purchase of credit receivables should be understood as "granting credits" since the credit risk is transferred to the person buying those receivables. As a result, where the purchaser also takes deposits or other repayable funds from the public, the Commission thought such purchase should be considered an activity requiring authorisation for the purposes of the CRD.

In our view the main risk is to purchasers in the secondary loan market is regulatory rather than economic. This is because it may be commercially difficult for a sophisticated EU borrower to claim that a loan originated in accordance with applicable law subsequently becomes illegal and void as a result of a transfer between lenders (although the risk of challenge would be greater in connection with SME or consumer lending and lender risk appetite may vary depending on the borrower profile).

As such, from a regulatory perspective (general expectations and good arguments aside) this might be an area where it is sensible to engage with the EBA or local authorities (who in line with current third country branch authorisation guidelines will review applications for branch activity with reference to those activities covered by authorisation and those that do not need to be under national law).

We are now past the grandfathering cut-off date, and given reports of the chilling effect CRD VI has already had on cross-border lending (not least due to late transposition in many cases), clarification would certainly be appreciated to ensure money keeps flowing in the secondary loan market where it can, not least given the pressing need to be able to access global liquidity markets.

Authored by Alix Prentice, Sinead Meany, and Charles Elliott.