The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium Sized Enterprises) Regulations 2015 (SI No. 585 of 2015) (the “2015 Regulations”) purport to replace an existing code of conduct issued by the Central Bank in respect of lending to small and medium sized enterprises (the “SME Code”).
During the course of the economic recession steps were put in place by the Central Bank to issue a form of Consumer Protection Code which would regulate activities of those providing credit to SMEs. The rationale for such code was that SMEs were struggling to meet on-going debt requirements and protections needed to be put in place so that they were dealt with on a transparent basis, that there were controls in place for lenders in dealing with arrears and re-structuring arrangements.
In January 2015 the Central Bank announced a review of the SME Code and as a result of such review published in December, the 2015 Regulations. The 2015 Regulations contain much of the same elements of the existing SME Code, but has significantly enhanced its provisions. It is an attempt to bring lending in the SME sector more aligned to the provisions of the Consumer Protection Code. The 2015 Regulations are comprehensive and represent a significant regulatory oversight of this area by the Central Bank.
The 2015 Regulations apply to regulated entities and while not stated in the 2015 Regulations a regulated entity must be treated as an entity that is regulated by the Central Bank. It applies to regulated entities when they carry out lending, but also includes a regulated entity making preparatory steps for lending. The 2015 Regulations come into force on the 1 July 2016 in respect of regulated entities and the 1 January 2017 in respect of Credit Unions.
There are two levels of regulation within the 2015 Regulations: those that apply to obligations to a micro and small enterprises (SMEs); and those that apply to obligations to medium sized enterprise (MSE). An SME is any enterprise which employs fewer than fifty people and has an annual balance sheet total which does not exceed €10m. A MSE is an entity which is above that threshold but employs lest than two hundred and fifty persons and has an annual turnover not exceeding €50m and an annual balance sheet total not exceeding €43m.
An SME does not necessarily have to be a company. It applies equally to partnerships, sole traders as well as corporate entities.
The following is a summary of some of the key obligations that arise in respect of lending to an SME (number references are references to the regulations within the 2015 Regulations):-
A lender shall not offer pre-approved borrowing to the SME (7);
- Training must be provided by the lender to staff on an on-going basis which must in particular deal with the 2015 Regulations, the lender’s policies and procedures for assessment of credit and for dealing with borrowers in difficulty (8);
- The new 2015 Regulations require lenders to offer a review meeting with a borrower (9). This is far more advanced than required under the old SME Code, in that the offer of the meeting must be made annually and the scope of the review must now include, the agreement, the security and any restructuring of lending;
- In line with similar elements of the Consumer Protection Code, lenders must now have warning information for advertisements (11);
- As with other rules, and in particular European rules relating to credit, lenders are now obliged to provide core information to customers, such as name, address, duration of agreement etc. prior to entering into a contract (12);
- Lenders must at least once a year provide to customers a statement of amounts paid, interest charged and other general information regarding the relationship (13);
- Following on from the old SME Code and aspects of the Consumer Protection Code, lenders are required to assess the suitability of credit for customers (14(3)). This has two elements. A lender must gather enough information to assess whether lending is suitable. Secondly it shall only offer lending if suitable. Parts of these rules do not apply to companies with a turnover less than €3 million (as that is covered by the Consumer Protection Code) or for non-incorporated bodies with a turnover over €3million.
- In line with the general policy of having clear information, the 2015 Regulations state that lenders shall publish on their website a range of information and also have this information available to borrowers in any office of the lender (14);
- Following the spirit of the previous SME Code there are detailed provisions (but now more enhanced) which relate to refusing or withdrawing credit (16), arrears (17), cases in financial difficulty (18), dealing with customers in financial difficulty (19 – 25). Much of the concepts and rules here will be familiar to compliance managers which have put in place credit policies in line with the old SME
- Part 3 of the 2015 Regulations deals with matters relating to medium sized enterprises. Much of the same obligations that apply to SMEs apply to MSEs but on a more slimmed down basis. Common provisions include, requirements to hold an annual review meeting, information requirements, annual statements, rules relating to security, refusing or withdrawing credit, arrears policies and information given to borrowers in financial difficulty.
The new 2015 Regulations have been well flagged for a considerable period and follow in many respects the terms of the draft issued in the initial consultation. However, they represent a comprehensive and detailed compliance obligation for regulated entities engaged in lending. A full review should now be taken by compliance officers of credit policies, on-boarding procedures and customer documentation to ensure that their lending clients are fully in keeping with this significant regulatory burden.
Colm Kelly solicitor is principal of the firm Healy Crowley Ahern. His practice concentrates on debt recovery and retail financial services compliance with a special focus on the areas of hire purchase, leasing and asset finance.
A pdf version is also available here Central Bank Launches New SME Lending Rules