The regulation came into place in order to “favour[ing] the secondary market for non-performing loans” (Article 36(5) paragraph 4 of the Regulation No 575/2013 (CRR)). During the last two years, the non-banking-regulated part of the debt purchasing industry has faced significant challenges due to over-leverage and high goodwill exposures on balance sheets. This has, if anything, lead to a less liquid Non-Performing Loan (NPL) market, at a time when this is needed the most. Banks around Europe need to off-load backstop-affected exposures, but at the same time the buy-side is restricted. With the purpose to ensure a deep and liquid secondary market for NPLs in Europe, “specialised debt restructurers” (SDR) are even more needed today than when the regulation was agreed.

Article 36(5) states that to be classified as an SDR, an institution must comply with all the specified criteria “during the preceding financial year”. 

Article 36(5) aims to cater for financial institutions who ensure a liquid and competitive market for NPLs in Europe and who uphold the same high standards of governance and oversight as other credit institutions. The SDRs are exempt from the backstop regulation, as their core assets are NPLs. These NPLs are bought at market price at significant discount to the original value of the loan leading to predictable and stable cash flows. The remaining credit risk is therefore negligible. 

The Regulation (EU) 2024/1623 amending the CRR was adopted as late as 9 July 2024 and is valid from 1 January 2025, leaving less than 6 months from adoption to qualification. This makes it virtually impossible to be compliant until 1 January 2025 if a full financial year is necessary to qualify. In that case, 1 January 2026 would be the first possible date.

In addition to the above, we see the following issues – contradicting the purpose of the regulation – with interpreting the text as meaning the full preceding financial year:

1. Time to report: From the regulation: “EBA shall monitor the activity of specialised debt restructurers and shall report by 31 December 2028 to the Commission on the results of such monitoring and, where appropriate, shall advise the Commission as to whether the conditions to qualify as “specialised debt restructurer” are sufficiently risk-based and appropriate in view of favouring the secondary market for non-performing loans, and assess if additional conditions are necessary” (Article 36(5) paragraph 4 CRR). If nobody in Europe is able to qualify before 1 January 2026, it will be a very short period to assess, and the secondary market for NPLs will be less liquid and competitive as a result.
2. Distorting competition: It penalises institutions that already have a large portfolio of NPLs compared to new startups. The startup with a minimal balance sheet, can comfortably reach the criteria at minimal cost, while a long term and more experienced banking regulated NPL-investor/manager would be penalised.
3. Undue cost burden: If "during the preceding financial year" shall be interpreted as institutions having to comply with all the terms for the full preceding year, and the regulation came into force 1 January 2025, then in effect 1 January 2026 would be the first possible date to qualify as SDR. This would represent a negative transition period for the implementation of the regulation for institutions aiming to become SDRs. It would also represent an undue cost burden as one of the requirements is to hold an NSFR-ratio of 130%. Since NPLs have an RSF-factor of 100% in the CRR, an institution whose assets are 100% NPLs would have to pay a significant price to achieve a 130% NSFR. Holding that NSFR-ratio for a full year without benefits (i.e. without becoming an SDR) would be associated with a undue cost burden. For example, for an institution with a €3bn portfolio, the cost of 30 pp additional NFSR would be c. €7m per year.
4. Undue complexity and risks: In addition to carrying the cost of being an SDR, it is likely that an SDR in waiting would need to resort to other solutions to manage back-stop claims such as securitisations, while at the same time fully complying with the criteria. This would introduce further costs, complexity and risks. This is unlikely the intent of the legislator.
5. Wording of the legal text: If the legislator had intended that a full financial year would be necessary to qualify, it would have been easy to clarify this intent in Article 36(5) of the CRR by inserting the word “full”.