Communications - Communication of 12 January 2022

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DEPARTMENT OF BANKING AND FINANCIAL SUPERVISION BANKING SUPERVISION SERVICE 2 FINANCIAL INTERMEDIARIES SERVICE DEPARTMENT OF CUSTOMER PROTECTION AND FINANCIAL EDUCATION SUPERVISION OF INTERMEDIARIES' CONDUCT SERVICE

Financing operations against assignment of the fifth of salary or pension. Risk profiles and supervisory guidelines.

Financing against assignment of the fifth of salary or pension (hereinafter, "CQS/CQP")1, which can be provided by banks and financial intermediaries under Article 106 of the TUB, have long constituted an important form of financing for consumers, also from the perspective of financial inclusion.

The peculiarities of the product, which require the mandatory presence of guarantees, combined with the recent modification of prudential provisions introduced by EU Regulation No. 873/2020, which recognized their lower riskiness by allowing reduced weighting of operations for the calculation of capital requirements (so-called CRR Quick-fix), have contributed to fueling growing interest from operators in this market.

For this reason, this communication aims to draw the attention of banks and financial intermediaries registered in the register referred to in Article 106 of the TUB to the necessity of an adequate assessment of the risks that remain attributable to this technical form, as well as to compliance with provisions regarding transparency and fairness in relationships with customers.

Regarding credit risk, it should be noted that this is mitigated by the repayment method, which occurs through source deductions on monthly salary or pension installments received by the debtor and paid by third parties, as well as by the aforementioned mandatory presence of insurance policies for premortality and unemployment risk. This lower risk has also been recognized at the prudential level by the aforementioned CRR modifications, which reduced the weighting factor from 75% to 35%.

However, lower credit riskiness must not exclude the necessity for lenders to fulfill obligations to assess customer creditworthiness, taking into account the debtor's overall economic-financial situation, as evaluating the employer's financial position alone is insufficient. An adequate assessment of customer creditworthiness is also aimed at preventing over-indebtedness risks. In this regard, intermediaries are reminded of the recent legislative intervention regarding the resolution of over-indebtedness crises3, which explicitly provided for the possibility of write-downs and restructuring even for debts arising from "CQS/CQP" financing contracts, and, more generally, the necessity for the crisis resolution body to indicate in its report whether the lender considered the debtor's creditworthiness during the credit granting phase.

The financing form in question requires, among other things: i) interface with third parties for the collection of installments (Third Party Assigned Administration – ATC); ii) the use of adequate information systems to manage and monitor the peculiar collection forms of this loan; iii) the management of

1 The "CQS/CQP", introduced in Italy with Presidential Decree 5 January 1950 n. 180, to facilitate access to credit for state employees, was subsequently extended to private employees and pensioners, both public and private.
2 See Supervisory Guidelines on assignment of the fifth of salary or pension, Section I.
3 See Decree-Law 28 October 2020, n. 137 (so-called Ristori Decree), converted with modifications by Law 18 December 2020, n. 176, which introduced some modifications to Law 27 January 2012, n. 3 regarding procedures for the resolution of over-indebtedness crises.

Pag. 2/2 relationships with insurance companies for the conclusion and potential enforcement of insurance policies; iv) the management of any early repayment of the loan, with consequent obligations to reduce the total cost of credit under Article 125-sexies of the TUB; v) the control of the distribution network. Lenders are therefore required to set up specific organizational and control measures to monitor exposure to operational risks, which are particularly relevant when entering a new market.

Similar considerations can be made when the business model – as happens especially in the case of several companies active in the sector registered in the register referred to in Article 106 of the TUB – provides that "CQS/CQP" loans are periodically and systematically sold pro soluto to third parties (so-called originate-to-distribute, OTD). In such cases, it is frequent that the management of collections, any early repayments, the fulfillment of periodic communication obligations to customers, and the management of any complaints remain with the seller. In any case, the acquiring intermediary remains obliged – to better safeguard its own operational and reputational risks and also to avoid infringing customer rights – to adopt adequate control systems on the performance of the originator, providing appropriate information flows and preparing for periodic and structured verification activities. In general, the acquiring intermediary should carry out adequate due diligence on the acquired portfolio each time, in order to evaluate not only the credit risk, but also the aforementioned legal and reputational risks, also in light of the evolution of the relevant regulatory framework4.

It is customary for this technical form that lenders avail themselves of an external network of agents and/or brokers and/or other financial intermediaries for the placement of the product. In this case, lenders are exposed to further legal and reputational risks, correlated to any non-compliant conduct by the network5. They must, therefore, have an adequate selection system as well as suitable control measures on the performance of the distribution network, aimed at preventing any critical issues, identifying them promptly, and taking remedial actions6.

It is also necessary that internal rules on remuneration and incentives are aligned with current legislation and do not constitute incentives for the placement of products inconsistent with the overall economic-financial situation of customers7.

Furthermore, liquidity risks and market risks connected to operations that could derive from: a) any slowdown in sales to third parties, also linked to contingent adverse market situations; b) the sale of credits at prices lower than their current market value, do not appear negligible, especially for companies adopting an OTD model.

Finally, bearing in mind the ongoing digitalization process in the banking and financial system and, prospectively, the potential development of the credit process through the use of IT platforms, it is appropriate to emphasize the need to ensure compliance with the relevant regulatory framework for remote lending, given the liability profiles that remain with supervised intermediaries.

In relation to all the above, the Bank of Italy will intensify supervisory action towards supervised companies active in the "CQS/CQP" sector; portfolio monitoring and inspection checks will be the opportunity to verify the effective management of all risks associated with this form of credit and to ascertain the adherence of market practices to the relevant regulatory framework.

4 Supervisory Guidelines on assignment of the fifth of salary or pension, Section IX.
5 See, for example, Article 128-terdecies, paragraph 2, of the Banking Consolidation Act, which provides for the explicit responsibility of the financial intermediary for compliance with transparency obligations by its agents.
6 See Supervisory Guidelines on assignment of the fifth of salary or pension, Section VI.
7 See Supervisory Guidelines on assignment of the fifth of salary or pension, Section VII.