- Greater transparency around the application process required.
- Lenders to provide greater protections for guarantors.
- Credit Unions will come under this legislation in January 2017.
The Central Bank of Ireland has published new regulations for firms lending to SMEs, with which regulated lenders (other than credit unions) must comply from 1 July 2016 or, in the case of credit unions, from 1 January 2017.
The regulations introduce specific requirements for regulated lenders, including:
- Giving SME borrowers greater transparency around the application process.
- Providing SME borrowers with reasons for declining credit, in writing, that are specific to their application.
- Providing greater protections for guarantors.
- Contacting SME borrowers who have been in arrears for 15 working days.
- Warning SME borrowers if they are in danger of being classified as not co-operating.
- Expanding the grounds for appeal and setting up an internal appeals panel.
Mr. Bernard Sheridan, Director of Consumer Protection, said: “The regulations aim to strengthen protections for SMEs, while also facilitating access to credit, by introducing specific requirements that regulated lenders must comply with”.
The regulations require firms to contact borrowers who are in arrears for 15 working days, in order to identify the reason why. This will allow them to assess whether the SME borrower’s circumstances are such that the requirements placed on firms for dealing with borrowers in financial difficulties should apply to that borrower.
In addition, under the regulations, borrowers will be entitled to an internal appeal of a decision made by a firm. Firms will be required to have an internal Appeals Panel for this purpose. SME borrowers in danger of being classified as not co-operating must be provided with a warning.
The SME Regulations are available here. The Central Bank has also published a feedback statement to the public consultation on the review of the SME Code (CP91).
The enhanced protections will apply to micro and small enterprises. However, the protections of the existing SME Code, as they appear in the SME Regulations, will continue to apply for the benefit of medium-sized enterprises. Guarantors will benefit from the enhanced protections, regardless of the size of the enterprise seeking or availing of credit.
The regulations will come into effect and apply to regulated entities, except credit unions, from 1 July 2016. Until then, the existing SME Code will remain in place.
Credit unions are not currently subject to the SME Code but will be subject to the SME regulations. For credit unions lending to SMEs, the regulations will therefore take effect six months later, on 1 January 2017.
In conjunction with the publication of the SME Regulations, the Central Bank has published a feedback statement to the public consultation on the review of the SME Code (CP91).
Further information on the requirements under the regulations:
Greater transparency for borrowers around the application process
Regulated lenders will be required to publish on their website, or otherwise make available to borrowers, specified information including information in relation to the application process, the timelines and information about Government support schemes.
Reasons for decline that are specific to an SME borrower’s application.
Where declining an application for credit, a regulated lender will have to provide the borrower with the reasons for decline and these must be specific to the borrower’s application.
Greater protections for guarantors
Regulated lenders will be required 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 will also be required to keep guarantors informed at crucial times during the lending relationship, for instance, where a borrower is in financial difficulties.
Regulated lenders will be required to contact borrowers in arrears
Where a borrower is in arrears for 15 working days, the regulated lenders must inform the borrower that it is in arrears, seek to identify the reason why and assess whether the borrower’s circumstances are such that the requirements placed on regulated lenders for dealing with borrowers in financial difficulties should apply to that borrower.
A warning for SME borrowers in danger of being classified as not co-operating
The regulations introduce a concept of ‘not co-operating’ which will act as a warning system for SME borrowers in financial difficulties who are not co-operating with the lender and who may, for instance, be at an increased risk of having security realised.
Expanded Grounds for Appeal and an internal Appeals Panel
The regulations will expand the grounds for appeals by SME borrowers that are available under the existing SME Code. An SME borrower will be entitled to appeal:
- A decision to refuse a credit application.
- A special term or condition imposed by a regulated lenders on the granting of credit or on an alternative arrangement.
- The withdrawal or reduction of a credit facility.
- The refusal to offer an alternative arrangement.
- Where the borrower has been classified as not co-operating.
Regulated lenders will be required to have an internal Appeals Panel comprising at least two decision makers who have not been involved in the SME borrower’s case previously and who have sufficient knowledge and expertise to conduct the appeal.