The Central Bank of Ireland (the “Central Bank”) has published the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the “SME Regulations”). The SME Regulations set out a number of protections for SMEs when borrowing from regulated financial service providers (“RFSPs”) including banks and credit unions. In doing so, they aim to strengthen protections for SMEs, while also facilitating their access to credit. RFSPs will need to put in place policies, systems and procedures and implement staff training for the purpose of complying with the SME Regulations.
As detailed in our previous briefing (available here), on 11 January 2015 the Central Bank published a consultation paper (“CP91”) on its proposed review of the Code of Conduct for Business Lending to Small and Medium Enterprises (the “SME Code”), which includes a set of draft regulations (“Draft Regulations”). In CP91, the Central Bank proposed replacing the SME Code with regulations, to extend the scope of the regulations as compared with the SME Code and to strengthen the protections available to SMEs in a number of areas. Following on from this consultation, the Central Bank has now published the SME Regulations.
Overview of the SME Regulations
The SME Regulations are divided into three parts: Part 1 has preliminary and general provisions, Part 2 applies to lending to micro and small enterprises, and Part 3 applies to lending to mediumsized enterprises. While there is some overlap between the requirements of the SME Code and those set out in the SME Regulations, in general the regulations are much more detailed and prescriptive than the SME Code. One of the most significant differences between the SME Code and the SME Regulations is in their respective scopes of application (see “Scope” below). In addition, the SME Regulations include certain additional protections for borrowers prior to being classified as ‘not co-operating’, new protections for guarantors, as well as making a number of other changes.
The scope of the SME Regulations differs in a number of respects from that of the SME Code, both as regards RFSPs and as regards SMEs. Parts of the SME Regulations will also apply to business credit cards.
The SME Code applies to regulated entities, excluding credit unions, when providing certain credit products within the State to
SMEs operating within the State. Generally, its requirements cover all SMEs, although certain provisions apply only for the benefit of “smaller enterprises”, including those relating to advertising, unsolicited credit, notification for guarantors, and the provision of a cost comparison when consolidating credit facilities.
For the purposes of the SME Code, a “smaller enterprise” is one which has an annual turnover of €3 million or less, excluding group members with a combined annual turnover in excess of this amount. A “small and medium enterprise” is as defined in European Commission recommendation 2003/361 which categorises an SME as an enterprise which has:
- fewer than 250 employees; and
- an annual turnover not exceeding €50 million (but in excess of €3 million); and/or
- an annual balance sheet not exceeding €43 million.
Business credit cards are included in the scope of the SME Code, but only in respect of the smaller enterprises provisions.
In contrast, the SME Regulations apply to all RFSPs including credit unions. While medium-sized enterprises will continue to benefit from the existing protections of the SME Code as they appear in the SME Regulations, other protections will only apply in their entirety for the benefit of micro and small enterprises.
The SME Regulations define the term ‘micro and small enterprise’ as an enterprise which employs fewer than 50 persons and which has an annual turnover and annual balance sheet total which does not exceed €10 million. This means that a number of enterprises which do not qualify as a smaller enterprise under the SME Code, will qualify as a micro and small enterprise under the SME Regulations. Regarding medium-sized enterprises, for the purposes of the SME Regulations a medium-sized enterprise is an enterprise that is not a micro and small enterprise and which has:
- fewer than 250 employees; and
- an annual turnover not exceeding €50 million; and
- an annual balance sheet not exceeding €43 million.
Unlike the SME Code, this definition in the SME Regulations does not refer to the European Commission recommendation 2003/361. In addition, under the SME Regulations an entity with the requisite number of employees must meet both the financial thresholds whereas under the SME Code it is sufficient if the entity meets one or the other of those thresholds. As a result, a number of enterprises which currently fall within the SME Code will no longer fall within the scope of the SME Regulations.
Business credit card borrowers benefit from some additional protection under the SME Regulations. Specifically, while the SME Regulations continue to apply the existing protections relating to unsolicited credit (regulation 7) and advertising (regulation 11(4)) to business credit cards, they also provide for certain protections in the case of arrears and financial difficulties.
The SME Regulations include certain additional protections for borrowers prior to being classified as ‘not co-operating’, which are largely inspired by similar protections in the Central Bank’s Code of Conduct on Mortgage Arrears.
Under the SME Regulations, an RFSP must make available an information booklet for borrowers which includes information outlining the implications for borrowers where they are deemed to be not co-operating. This may include the refusal to offer an alternative arrangement, institution of legal proceedings or enforcement of security. In addition, the SME Regulations permit an appeal to be made by a borrower that has been classified as not co-operating.
The SME Regulations provide greater protection for guarantors as compared with the SME Code. Under the SME Regulations, where an RFSP seeks security by way of a guarantee, it must provide the intended guarantor with certain information including a clear explanation of why the guarantee is required and the potential consequences of providing the guarantee. Specified warning statements must be included in the explanation and in the guarantee documentation.
The SME Regulations make a number of other changes to the requirements governing SME lending. In particular, an RFSP must:
- provide specific information about its credit application process including the type of information that may be required in support of the application and the timelines applicable to a credit application assessment (regulation 14);
- inform a borrower of its reasons for refusing a credit application in a durable medium: the reasons must be specific to all or part of the relevant borrower’s application (regulation 16); and
- contact an SME borrower that has been in arrears for 15 working days in order to confirm that the borrower is in arrears and, if possible, to identify the reasons for the arrears (regulation 17).
In addition, the SME Regulations confirm that an RFSP will be fully responsible for discharging its regulatory obligations when it outsources any functions relating to activities within the scope of the SME Regulations.
They also stipulate additional grounds on which an internal appeal can be made. These include decisions by a lender to refuse credit, withdraw or reduce credit and the terms and conditions imposed by an RFSP when granting credit and alternative arrangements. An RFSP must establish a dedicated appeals panel to conduct internal appeals.
Comment and Next Steps
The Central Bank’s publication of the SME Regulations is an important development which will have immediate and significant implications for all RFSPs. This is particularly the case as the SME Regulations come at a time when the new regulatory regime for credit servicing firms is being bedded down: this regime effectively extends regulatory protections to SMEs that originally enter into a credit agreement with a relevant RFSP, where that agreement is subsequently sold to an unregulated third party (see our related briefings here and here).
With the exception of a credit union, each RFSP now has until 1 July 2016 to review its existing policies, systems and procedures and ensure its compliance with the more detailed and at times novel requirements of the SME Regulations, including in particular their altered scope.
While many credit unions are faced with the more challenging task of putting in place new policies, systems and procedures and implementing staff training, they benefit from a longer lead-in period in that for credit unions, the Regulations will first take effect on 1 January 2017.