The SME Regulations 2016
From July 1st 2016, regulated lenders (other than credit unions) must comply with additional requirements in respect of SME lending, enforcement and the taking of security.
The Central Bank highlight that these include (i) giving SME borrowers greater transparency around the application process; (ii) providing SME borrowers with reasons for declining credit, in writing, that are specific to their application; (iii) providing greater protections for guarantors; (iv) contacting SME borrowers who have been in arrears for 15 working days; (v) warning SME borrowers if they are in danger of being classified as not co-operating; and (vi) Expanding the grounds for appeal and setting up an internal appeals panel.
The Central Bank of Ireland has made the following regulations (amending existing regulations) which apply to small and medium-sized enterprises. These regulations will come into operation on the 1st July 2016 for those regulated entities that are not considered credit unions and will apply to credit unions on the 1st January 2017. These regulations apply to a regulated entity which
- Provides or offers to provide credit to a borrower
- Entering or offering to enter into a credit facility agreement
- Proposing a credit facility agreement
- Providing or offering an alternative arrangement
- Engaging in credit servicing activities
A regulated entity will be fully responsible for settling its obligations when it outsources.
The two different categories of small and medium enterprises include:
1. Micro and small enterprises
- These include enterprises which currently employ less than 50 persons and whose annual turnover and balance sheet total is €10 million or less
2. Medium-sized enterprises
- A micro, small and medium-sized enterprise that is not a micro and small enterprise
- This regulated entity must offer borrowers with the option of a meeting to review credit facility agreements, security and alternative agreements.
i. Unsolicited credit
- This only applies to lending to micro and small enterprises
- The regulated entity must only offer credit to a borrower after an application by a borrower for this credit.
ii. Expertise for business lending and annual meetings
The regulated entity should provide appropriate training to the staff involved on the requirements and the policies for an application for credit, dealing with borrowers who maybe in positions of financial difficulties.
- The regulated entity must also provide contact points to those enquiring into the provisions of credit.
- The regulated entity should offer an annual meeting which should include a credit review and if/where the borrower accepts arrange the meeting, meet the borrower and complete the credit review in line with the requirements.
- The regulated entity should inform the borrower of the timeframe and the result and complete the credit review within a reasonable timeframe.
iii. Provision of information
- Information must be provided by the regulated entity in a clear manner which does not disguise information to the borrower and must be issued in a way which is clear. The regulations also ensure a warning statement is issued.
- This only applies to micro and small enterprises
An advertisement for credit should;
- Include a warning statement and if it includes an interest rate the regulated entity should state whether this is fixed or variable
- Display the total cost of credit to the borrower
- Indicate the difference between the total cost of credit and the consolidated credit
v. Pre-contract information
- The regulated entity must provide the borrower with information and guidance in terms of what would constitute a successful credit application which includes the type of agreement, total amount of credit, duration of agreement, outline of steps and applicable interest rate
- Before a borrower is bound by a credit facility agreement, the regulated entity must provide the borrower with information concerning the credit facility agreement and the payments to be made by the borrower
- In certain cases, the charges for payment transactions, other charges arising from a credit facility agreement and warning statements including the borrower’s rights must be stated
- For micro and small enterprises where applicable the charges for maintain accounts, payment charges or other charges concerned with the credit facility agreement.
vi. Post-sale information
- A regulated entity shall provide a borrower with a statement which should include relevant information about the statements including the time, amount, balance and interest rates to which it relates , payments made by the borrower and regulated entity and interest rates or changes to interest rates applied and charged
- If a third party is involved, the borrower must be informed of the appointment in terms of its credit facility agreement, the role of the third party must also be explained to the borrower
vii. Applications for credit
A regulated entity should;
- Publish information on its website and ensure borrowers have knowledge of the regulated entity dealing with lending. This includes that the borrower is entitled to a meeting with the regulated entity, timelines for credit applications , information about government support schemes and description of security
- Acknowledge credit applications within 5 working days
- Gather and record information from the borrower and judge whether credit is appropriate to that borrower
- Offer a credit facility agreement when it has satisfied the credit is suitable and the borrower is able to repay the debt over the course of the credit facility agreement
- If the regulated entity does not make a decision within 15 working days then the borrower must be informed of the reasons why and information must be provided
viii. Security (Guarantees)
- If a regulated entity seeks security ( to include a guarantee) to support an application this must be reasonable and proportionate. The regulated entity must provide the borrower with information concerning why this security was required and the repercussions for the borrower in providing this security. The explanation must include a warning in specific terms for non personal guarantees and a further form of warning for personal guarantees.
- If the regulated entity makes an offer of credit to a borrower subject to guarantee a guarantee document must be provided which would include the relevant obligations of the guarantor.
- A regulated entity in realising security, the guarantors must also receive information so that they are aware of the level of residual debt. Where a Borrower is in financial difficulties: guarantors will also receive ( where the borrower is a micro and small enterprise ) notification when that borrower goes into financial difficulties.
ix. Refusing or withdrawing credit
- If a regulated entity refuses a borrower’s credit application it must inform the borrower and provide relevant information including:
- The reasons for the application’s refusal and the specific parts of the application which were refused
- How to appeal an application
- The borrower’s rights to make a complaint
- The regulated entity must offer the borrower with the option of an immediate review of the credit facility agreement, alternative agreements and security
- If the borrower agrees to the review the regulated entity must perform this review and identify the options available to the borrower and address the borrower’s likely arrears or areas of financial difficulties
- The regulated entity should inform the borrower of the outcome of the review
- If a borrower remains in arrears for 15 working days the regulated entity should contact the borrower
- The regulated entity should contact the borrower and confirm it is in arrears and inform the borrower of the outcome of the assessment
xi. Financial difficulties
A regulated entity should maintain policies for dealing with borrowers who may be in financial difficulty and should aim to assist the borrower to resolve financial difficulties and provide information;
- On the procedure that the regulated entity will apply and how it plans to implement this
- Information to evaluate the financial situation of the borrowers
- The types of alternative arrangements and the criteria which the regulated entity will apply when considering which alternative agreement is appropriate to a borrower
- The borrower must be made aware of the extra fees for borrowers in financial difficulties
A regulated entity should make available information to borrowers information concerning;
- The procedure for dealing with borrowers in financial difficulties
- An explanation that the regulated entity may offer the borrower an alternative agreement to help resolve the financial difficulties, may be entitled to impose additional fees or charges
- The type of criteria which could apply to the borrower’s financial difficulties
- A statement issued stating the financial difficulties may impact on the credit rating
Communication with borrowers should be carried out to give the borrower sufficient time to complete an action and not in an aggressive manner. The regulated entity should state the implications of not co-operating to the borrower. The regulated entity must ensure that within 10 working days it informs the borrower of the status of the account, applicability of above regulations, impact of the difficulties and an optional review of the borrower’s credit facilities.
xii. Independent reviews
The regulated entity should provide the borrower with reasons for the review, the cost of the review and information on what would be covered by review. The cost of the review should be proportionate to the amount of credit provided under a credit facility agreement.
xiii. Alternative arrangements
- A regulated entity should include information concerning the timeframe for the borrower, the new repayment amounts, the relevant implications, the frequency of review, the application of interest and charges
- When an alternative arrangement terminates, the regulated entity must review the circumstance of the borrower to assess the need for another alternative arrangement.
- A regulated entity shall establish and implement internal appeals procedures allowing a borrower to appeal various decisions of the regulated entity including the refusal of credit applications or the withdrawal of a credit facility
- The appeals should be conducted in such a way that is carried out without prejudice and the borrower should be informed on how long it will take to make a decision and the reasons as to why it may take longer.
xv. Handling complaints
- A regulated entity should try to resolve complaints between borrowers and adhere to correct and proper procedure when dealing with these. This would include that the regulated entity must acknowledge the complaint and provide the borrower with the name of the person in relation to the complaint
- A regulated entity must resolve a complaint within 40 working days and provide regular updates to the borrowers including the outcome of the investigation and the offers of settlements
- For medium-sized enterprises complaints must be resolved in satisfaction in at least 5 working days
xvi. Records and compliance
- A regulated entity should prepare and maintain records for credit and relating to applications which have been refused and should ensure when dealing with borrowers it employs effectively its resources
© Paul Foley and Andrew Clarke, McKeever Solicitors, 30th July 2016
This article is a general review of the law on the subject and is not intended to be a complete statement of the law. Specific legal advice must be sought on a case by case basis. For further information, please contact Paul Foley or Andrew Clarke.
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