New practice in relation to the sale of non-performing loans
In its guidance of 7 January 2020, the Danish Financial Supervisory Authority has changed its practice in relation to financial undertakings’ disclosure of confidential customer information in connection with the sale of non-performing loans. The change has been made in dialogue with the Danish financial sector and will benefit both financial undertakings and potential buyers of non-performing loans.
Change of practice
Section 117(1) of the Danish Financial Business Act prohibits unjustified disclosure of confidential information by financial undertakings. As a general rule, all customer information is confidential. The Danish Financial Supervisory Authority has so far adopted a restrictive practice in relation to disclosure of confidential information, often effectively preventing the sale of non-performing loan portfolios (please note that the Danish Financial Supervisory Authority's practice covers receivables in default in a more broad sense) other than in connection with the transfer of a business unit, a business activity or a branch.
The Danish Financial Supervisory Authority's change of practice means that customers who are in default are no longer entitled to the same right to confidentiality as customers who repay their loan as planned. From now on, the seller of a non-performing loan will - on the basis of a specific assessment - be entitled to disclose general customer information such as name, address and date of birth, information about the loan such as principal amount, date of grant, terms, statement of account and interest accrued, as well as information about the enforcement of security interests. Disclosure is permitted only if relevant and necessary for the buyer’s collection of the debt. Disclosure of information which - on the basis of a specific assessment - is not relevant and necessary, e.g. customer credit ratings, will continue to be unjustified.
In the Danish Financial Supervisory Authority's view, a loan is non-performing where unsuccessful attempts have been made to collect the debt under the general rules of Danish law, i.e. following reminders and with the assistance of the enforcement court. We understand that the Danish Financial Supervisory Authority's definition of a non-performing loan should be taken literally. Therefore, the change of practice will likely be of limited practical importance as the vast majority of claims that are sought to be recovered through the enforcement court are typically small debts and debt collection claims and not larger business credits. As an example, debts where the debtor goes into bankruptcy will often be written off without any attempt at recovery through the enforcement court. Based on our dialogue with the Danish Financial Supervisory Authority, we understand that the Danish Financial Supervisory Authority has, however, not precluded itself from the right to decide, on the basis of a specific assessment, that a financial undertaking has a legitimate interest in transferring non-performing loans without first having made attempts at recovery through the enforcement courts (where the debts are not, due to their nature, normally recovered through the enforcement courts). A loan will not be regarded as non-performing if an agreement for repayment or an instalment plan exists.
Although not explicitly stated in the guidance, we believe that the change of practice will also be applicable to the disclosure of confidential information by consumer loan companies under section 12 of the Danish Act on Consumer Loan Companies.
New opportunities for Danish financial undertakings
The Danish Financial Supervisory Authority’s change of practice is intended to improve the conditions for Danish financial undertakings by ensuring more uniform rules compared to branches of foreign financial undertakings, which are not subject to the rules on confidentiality in Section 117 of the Danish Financial Business Act.
Thus, the change of practice may affect Danish banks with portfolios of non-performing loans that have already been written off. In the future, they will not necessarily have to incur costs in order to avoid time-barring, and they will be able to derive income from the sale of portfolios of non-performing loans. However, the requirement for prior recovery attempts through the enforcement courts means that the guidance will have less importance in practice.
The change of practice may also benefit debt collection agencies, credit service providers and other businesses specialising in buying and handling non-performing loans which will now get better access to buy and subsequently collect non-performing loans. As before the change of practice, the rules on confidentiality will continue to apply to recipients of confidential information (see section 117(2) of the Danish Financial Business Act).
Read the Danish Financial Supervisory Authority’s guidance of 7 January 2020