Croatia transposes NPL Directive

Croatia

Croatia transposed Directive (EU) 2021/2167 on credit servicers and credit purchasers (i.e. NPL Directive) through the adoption of the Act on the Manner, Conditions and Procedure of Servicing and Sale of Receivables, which entered into force at the end of 2023.

This process represented an important step forward in achieving the objectives of the NPL Directive and harmonising the rules on the purchase and servicing of non-performing loans (NPLs) in addition to addressing specific local goals.

The system before the Act

Prior to the adoption of the Act, the purchasing and servicing of NPLs were regulated by general rules of obligations law, banking law, consumer protection, data protection, etc., and to some extent by secondary regulations of the Croatian National Bank (CNB).

Under this regime, the activities of purchasing and servicing NPLs could generally be carried out by any company, provided that these activities were registered as part of its business in the relevant commercial register. Therefore, no special authorisation from a specific competent authority was required and the activities of such companies were subject to a limited, more general form of supervision.

The main objective of the new Act was to establish rules for the operation of companies engaged in the purchase and servicing of NPLs without disadvantaging any party, and to supervise the activities of such companies.

The NPL framework under the new Act

Licensing of NPL servicers

The new Act introduces a licensing requirement for entities engaged in NPL servicing, which they must obtain from the CNB. In deciding whether to grant a licence, the CNB must consider each applicant in light of the following: the reputation of the members of the management and supervisory boards (whether they have the necessary expertise and experience), the reputation of the shareholders, and whether the applicant has established adequate AML procedures and internal control mechanisms to ensure compliance with debtors' rights and other regulations, etc.

Once approval is obtained from the CNB, local NPL servicers may perform servicing activities. In addition to domestic entities, servicing activities in Croatia may also be performed by entities licensed in other EU member states through passporting.

NPL purchasers

The Act does not require NPL purchasers to obtain approval for purchasing. In order to purchase NPLs in Croatia, the NPL purchaser not domiciled in the EU must appoint a representative with a registered seat in the EU. If the purchaser wants to purchase NPLs of consumers, small entrepreneurs or SMEs, however, the purchaser needs to appoint a licenced servicer or obtain a servicing licence .

Under the Act, prospective NPL purchasers have the right to obtain information from credit institutions about the creditor's rights under the NPL agreement and the collateral in order to have all the necessary information to decide on the purchase. This was market practice before the Act, but the Act has formalised this.

After the purchase, the NPL purchaser needs to inform the debtor of the sale-purchase, the contact details of the new creditor and the NPL servicer, the debt and other relevant information. The obligation of the creditor to notify the debtor of the sale of the NPL existed before the Act under the rules of obligations law and continues to exist on the basis of such rules.

Credit institutions

New obligations for credit institutions under the Act primarily relate to notification and reporting.

The credit institution must inform the debtor of the intended sale of the NPL, the debt and how the debt can be repaid, among other things. This does not affect the above obligations of notification under the rules of obligations law as described in this article.

In addition, credit institutions are required by certain secondary regulations of the CNB to submit certain documents and information to the CNB prior to the intended sale of NPLs. Such secondary regulations of the CNB are not new and have been in place for years. After the sale of NPLs is complete, the credit institution must notify the CNB and provide relevant information.

Supervision

The CNB must supervise and check whether credit institutions, local NPL purchasers or representatives of foreign NPL purchasers, and NPL servicers to whom it has issued licences are operating in accordance with the Act.

The CNB may impose supervisory measures, such as ordering the removal of a member from the management and/or supervisory board of the above-mentioned entities, temporarily prohibiting the NPL servicer from providing one or more servicing services or revoking a licence, and other measures it deems appropriate to ensure that the entities are complying with the Act.

The CNB may also impose administrative fines for breaches relating to the protection of personal data, the appointment of an NPL servicer where required, notification to the CNB and other obligations.

Conclusion

With the introduction of the new Act, Croatia has created a framework for the NPL market that is in line with the NPL Directive, which is an important step towards the creation of a large European NPL market. At present, the NPL market in Croatia is relatively calm, but given the current economic situation, this may change and the potential growth of NPLs could create new opportunities for investors. With the Act, Croatia will be better prepared to meet these challenges and provide a safe and predictable business environment.

For more information on this Act and regulations surrounding NPLs in Croatia, contact your CMS client partner or these CMS experts.