On the 20 October, the Central Bank of Ireland issued a code of practice on lending to related parties which introduces statutory requirements in relation to lending by banks and building societies to related parties. The Code, which replaces previous non-statutory requirements, broadens the definition of a related party and reduces the maximum amount that can be loaned to an individual related party and the aggregate amounts that can be loaned to all related parties. Related parties include a director, senior manager or significant shareholder or the credit institution or an entity in which the credit institution has a significant shareholding, as well as a connected person of any of the aforementioned persons. The Code requires that:
- loans to related parties shall not be granted on more favourable terms than comparable loans to non-related parties;
- loans to related parties or any variation of the terms require board approval or approval by a sub-committee of the Board established specifically to deal with related party lending where that sub-committee reports directly to the Board;
- actions in respect of the management of such loans (eg grace periods, interest roll-up, loan right-off) require board approval or approval by a sub-committee of the Board established specifically to deal with related party lending where that sub-committee reports directly to the Board; and
- where loans to a related party exceed €1m the prior approval of the Central Bank is needed.
The Code applies to all Credit Institutions licensed and authorised by the Central Bank of Ireland and it applies to lending in or outside the State. Credit Institutions will be required to submit details of related party lending to the Central Bank on a quarterly basis. The Code becomes effective on 1 January 2011.