New Regulations for Business Lending to SMEs
On 18 December 2015, following a review of business lending to SMEs in early 2015, the Central Bank published the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the “Regulations”) for lending to SMEs by regulated financial service providers (“Regulated Entities”).
The Regulations replace the Code of Conduct for Business Lending to Small and Medium Enterprises (the “Code”) that was revised in 2012. The Regulations come into operation on 1 July 2016 to the extent that they apply to Regulated Entities that are not credit unions and, in the case of credit unions, on 1 January 2017. Until then, the Code remains in operation.
The obligations on Regulated Entities when lending to SMEs, particularly smaller and micro enterprises, have increased and with that comes more protections for those SMEs when borrowing. The Regulations do not apply to borrowing by a Regulated Entity authorised to provide credit, to multi-lender credit, to credit provided to special purpose vehicles and to certain aspects of business credit cards.
The Regulations are essentially divided into two sections, those that apply to (i) micro and small enterprises which employ fewer than 50 persons and which have an annual turnover and annual balance sheet total which do not exceed €10 million (“Small Enterprises”) and (ii) enterprises which are not Small Enterprises and which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million and an annual balance sheet total not exceeding €43 million (“Medium Enterprises”).
Some Key Highlights
In lending to Small Enterprises, a Regulated Entity is now required to provide appropriate training on an on-going basis to its staff to include, at a minimum, training with respect to the Regulations and lending to Small Enterprises, the Regulated Entity’s policies and procedures for assessing applications for credit and for dealing with borrowers in financial difficulties. It is also required, where relevant, to provide training with regard to its lending practices in relation to the different sectors to which it provides credit. This expertise must be made available through clear points of contact for enquiries.
The practicalities and timing in relation to annual meetings and credit reviews are dealt with in more detail, particularly in relation to Small Enterprises.
Small Enterprises are entitled to considerably more pre-contract and post-sale information under the Regulations as compared to the Code and there are also far more detailed information and administrative obligations on Regulated Entities in relation to the taking of security and guarantees. Allied to this is the obligation to provide guarantors with an explanation of the potential consequences for the guarantor of providing the guarantee which must include specified warning statements. Regulated Entities are also required to keep guarantors informed at crucial times during the lending relationship, for example, where a borrower is in financial difficulties.
There are enhanced protections for Small Enterprises when a Regulated Entity refuses a credit application. The Regulated Entity must provide an explanation of the reasons why the application for credit was refused and this explanation must identify the application or part of the application that was refused and be specific to the borrower’s application.
Where a Small Enterprise is in arrears for 15 working days, the Regulated Entity must inform that borrower that it is in arrears, seek to identify the reason why and assess whether that borrower’s circumstances are such that the requirements placed on Regulated Entities for dealing with borrowers in financial difficulties should apply to that borrower.
The Regulations include enhanced protections for both Small and Medium Enterprises in financial difficulties and, in particular, there is now an explanation as to what precisely “not co-operating” means (which concept is also found in the Code of Conduct on Mortgage Arrears 2013) and which will ensure that borrowers are not classed as not co-operating when they in fact are. A further welcome inclusion is that the Regulations now detail the implications for the borrower of not co-operating, including (i) the impact on the Regulated Entity’s consideration of an alternative arrangement, (ii) the impact on the Regulated Entity’s consideration of it exercising any existing legal or contractual rights to enforce security, and (iii) where security is realised, that the borrower will remain liable for any outstanding debt.
If you have any queries in relation to the content of this update, please contact Bryan McCarthy at firstname.lastname@example.org or +353 1 6054203