New Central Bank Regulations governing dealings between regulated entities and SMEs were signed on 17 December 2015. They will apply to regulated entities (other than credit unions) from 1 July 2016 and to credit unions from 1 January 2017.
This Briefing summarises the new Regulations and their potential impact. It has also been updated to take account of changes made to the new Regulations on 27 May 2016.
In January 2015, the Central Bank issued a Consultation Paper on a Review of the Code of Conduct for Business Lending to Small and Medium Enterprises, seeking industry feedback on proposed changes to its Code of Conduct for Business Lending to Small and Medium Enterprises 2012 (the SME Code). The purpose of the SME Code is to provide conduct of business protections to SMEs when receiving credit products from regulated entities in Ireland. The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the SME Regulations) were signed on 17 December 2015, and the Central Bank's Feedback Statement on its consultation was published at the same time.
The SME Code currently distinguishes between two categories of SME (small and medium enterprises, and smaller enterprises) with smaller enterprises receiving an additional layer of protection. The SME Regulations also distinguish between two categories - micro and small enterprises and medium-sized enterprises.
- Micro and small enterprises: Part 2 of the SME Regulations applies detailed protections to micro and small enterprises. A micro and small enterprise is an enterprise which:
- has less than 50 employees AND
- has an annual turnover of ≤ €10,000,000 AND/OR
- has an annual balance sheet total of ≤ €10,000,000.
- Medium-sized enterprises: Part 3 of the SME Regulations applies high-level (less granular) protections to medium-sized enterprises. A medium-sized enterprise is an enterprise which is not a micro and small enterprise and:
- has less than 250 employees AND
- has an annual turnover of ≤ €50,000,000 AND/OR
- has an annual balance sheet total of ≤ €43,000,000.
Effect of categorisation changes
The conditions for an SME to benefit from the detailed protections of Part 2 as a micro and small enterprise are slightly different to the conditions that an SME had to meet to be treated as a "smaller enterprise" under the SME Code. This could bring a larger number of SMEs into the scope of those provisions.
- Exemptions: As with the SME Code, the SME Regulations do not apply to multi-lender credit, credit offered to or granted by special purpose vehicles, or credit provided to a regulated financial services provider which is itself authorised to provide credit.
- Outsourcing: If a regulated entity outsources its obligations under the SME Regulations, it will still be treated as fully responsible for compliance with those obligations.
- Enforcement: The SME Regulations are without prejudice to a regulated entity's enforcement rights.
- Unsolicited credit: The restriction on offering or approving unsolicited credit has been retained, but only for micro and small enterprises.
- Business credit cards: While business credit cards are generally used by SMEs as a payment mechanism rather than as a source of credit, the Central Bank's view was that an SME could still encounter financial difficulties if it was unable to clear the balance on its business credit card. As a result, some of the protections given to micro and small enterprises under the SME Regulations (dealing with unsolicited credit, advertising requirements and borrowers in financial difficulties) will also apply where those micro and small enterprises use business credit cards.
- Training: The SME Regulations set out more detailed requirements for staff training for regulated entities dealing with micro and small enterprises.
- Points of contact: Regulated entities must have clear points of contact for enquiries in respect of lending to micro and small enterprises. In its consultation, the Central Bank had suggested that regulated entities have at least one person in each lending office with responsibility for dealing with these borrowers. It received feedback that this was too onerous, so it instead imposed the requirement in relation to points of contact.
- Annual reviews:
- More detailed: The provisions of the SME Regulations dealing with annual reviews are more detailed than those set out in the SME Code (and the procedure is considerably more detailed for reviews arranged with micro and small enterprises).
- Scope: An annual review for any SME must cover its credit facility agreements, related security and any alternative arrangements.
- Not informing the borrower: The regulated entity need not inform the borrower of the outcome of a credit review where the borrower has not been involved in the process (i.e. where the regulated entity has simply carried out an internal review in accordance with its own internal procedures), no changes are needed to the facility agreements and no actions are required from either the borrower or the regulated entity.
- How meetings can be held: The SME Regulations allow these review meetings to be held via telephone, video conference or other means of electronic communication.
- Advertising: The advertising provisions of the SME Regulations apply only in relation to micro and small enterprises. Additional warnings are now required when advertising variable rate credit, and advertising credit with an interest only period.
- Pre-Contract Information:
- More detailed: The information that must be provided to SMEs before they are bound by a credit facility is now considerably more detailed, in particular for micro and small enterprises.
- Emergency funding: Where an existing customer (being a micro and small enterprise) seeks urgent additional funding from a regulated entity and needs it within 3 working days, the regulated entity can send out the pre-contract information afterwards (as long as it does so within the next 3 working days).
- Annual statements: The information that must be set out in the annual statement issued to a micro and small enterprise is more detailed under the SME Regulations (under the SME Code, only details of the interest rate were required and this remains the case for medium-sized enterprises).
- Interest rate changes: Under the SME Code, changes in margin needed to be notified to SMEs. Under the SME Regulations, medium-sized enterprises need only be notified about interest rate changes arising out of a margin change, but micro and small enterprises must be given more detailed information (including revised payment details and advice that the borrower get in touch with the regulated entity if it expects to find it difficult to meet revised repayments).
- Appointing third parties: Regulated entities will need to tell micro and small enterprises when they have appointed a third party to deal with them, and the role of that third party.
- Applications for credit:
- Website: Regulated entities will have to publish information on their website about the credit application process. Regulation 14 sets out these requirements for micro and small enterprises. For medium-sized enterprises, only information on timelines needs to be provided (similar to the existing position under the SME Code).
- Application procedure: The SME Regulations set out considerably more detail around the procedure that a regulated entity should follow when a micro and small enterprise applies for credit.
- Online applications: The Central Bank flagged in its Feedback Statement that, while it has imposed the same credit application standards irrespective of whether the regulated entity is providing services online, it will review the interaction between the refusal provisions of the SME Regulations, and online applications for credit, before 1 July 2017.
- Suitability and appropriateness: Regulated entities will need to establish suitability and appropriateness for micro and small enterprises (other than those that would have come within the old 'smaller enterprises' definition of the SME Code). This applies to both initial credit and to additional credit.
- Additional information at the outset: Intended guarantors must be provided with substantially more information under the SME Regulations, both before the guarantee is entered into and in the guarantee document (by way of warning).
- Personal guarantees: Notably, warning statements regarding potential loss of the guarantor's home must be included in personal guarantees.
- Realisation of security: Guarantors will also receive information following the realisation of security so that they are aware of the level of residual debt.
- Borrower in financial difficulties: Guarantors will also receive (where the borrower is a micro and small enterprise) notification when that borrower goes into financial difficulties.
- Withdrawing or refusing credit: The information that regulated entities must provide to micro and small enterprises when withdrawing or refusing credit is considerably more detailed than that required under the SME Code. The regulated entity's refusal letter must also be specific to the application it received (so the use of generic refusal letters will be problematic).
- Detailed provisions: The SME Regulations contain more detailed provisions dealing with arrears management than the SME Code. Policies and procedures will need to be updated to reflect this.
- Immediate reviews: Immediate reviews will now need to be offered (and, where the borrower is a micro and small enterprise, additional provisions are included around the process for those reviews).
- Not co-operating: The SME Regulations include a new concept of "not co-operating" where a micro and small enterprise fails to make full and truthful disclosure, a warning letter has issued and the micro and small enterprise has not carried out the actions set out in that letter.
- Warning letters: Both micro and small enterprises, and their guarantors, must be sent a warning letter before the borrower is classified as not co-operating. They must each receive a further notification once that 'not co-operating' classification is made.
- Independent reviews: New provisions have been included whereby a regulated entity can require an independent review of the business of an SME that is experiencing financial difficulties. Again, any guarantor must be informed.
- Alternative arrangements: The provisions dealing with the information that must be provided to a borrower by a regulated entity where it is offering an alternative arrangement are considerably more detailed. Equally, the information that must be provided if a regulated entity is not offering such an arrangement, or if the borrower declines the offer of an arrangement, has been expanded slightly.
- Appeals: The appeals provisions of the SME Code were limited to decisions regarding alternative repayment arrangements. Under the SME Regulations, a medium-sized enterprise must, at a minimum, be able to appeal that type of decision however, micro and small enterprises must now be allowed appeal a greater range of decisions, including the refusal of a credit application, the inclusion of particular terms or conditions in a credit facility, the withdrawal or reduction of a credit facility or the classification of that borrower as not co-operating. The SME Regulations also impose more detailed procedural requirements around the appeals process itself where the borrower is a micro and small enterprise.
- Complaints: The complaints provisions of the Consumer Protection Code 2012 (CPC) have now largely been replicated in the SME Regulations (the CPC provisions were already applicable to dealings with smaller enterprises under the SME Code). As a result, this should not result in a substantial procedural change for regulated entities.
- Procedures: Regulated entities will need to focus on updating their procedures for annual review meetings, credit applications, dealings with borrowers in financial difficulties and appeals before the 1 July 2016 deadline.
- Training: Regulated entities will also need to put in place training programmes for staff in relation to the provisions of the SME Regulations dealing with micro and small enterprises.
- Documentation: A number of documents used by regulated entities in their dealings with SMEs will need to be amended to reflect the new requirements by 1 July 2016. These include the templates used to provide pre-contract information, standard form guarantees, annual statements, communications in relation to interest rate changes, letters withdrawing or refusing credit, information booklets for borrowers in financial difficulties, and letters to borrowers in financial difficulties. Regulated entities will also need to develop information for inclusion on their websites in relation to the credit application process, and templates for providing additional information to guarantors reflecting the additional rights afforded to guarantors under the SME Regulations.
- Advertising: New warnings will need to be included in advertisements for variable rate credit or credit with interest-only periods. The wording of the existing warnings in relation to debt consolidation and fixed rate credit has been slightly amended and these changes will also need to be reflected.
The changes introduced by the SME Regulations are more than merely cosmetic and are likely to require significant procedural and documentation changes. It took many regulated entities a little time to get to grips with the requirements of the SME Code, so we recommend that regulated entities take steps now to ensure compliance with the SME Regulations from 1 July 2016.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.