The Central Bank of Ireland has issued a Code of Practice introducing statutory requirements in relation to lending by banks and building societies to related parties.  Related parties include directors, senior managers or significant shareholders of the credit institution or an entity in which the credit institution has a significant shareholding, as well as any person connected to those parties.

The main requirements of the Code are set out below.

• Loans to a related party shall not be granted on more favourable terms than comparable loans to non-related parties.
• Prior approval of the board of directors of the credit institution is required for:
  • loans to related parties;
  • any variation of the terms of such loans; and
  • actions in respect of the management of such loans including grace periods, interest roll-up, loan write-offs, etc.
• Prior approval of the Central Bank is required where a loan to a related party is in excess of one million euro.
• Policies and processes must be in place to prevent a member of staff benefiting from lending to a related party and to prevent persons related to the borrower from being part of the process of lending to the borrower.
• Policies and processes must be in place to identify loans to a related party and to monitor and report on such loans.
• Senior management shall be obliged to report to the board of directors of the credit institution and to the Central Bank in respect of any deviation from any requirement of the Code.
• Loans to related parties shall not exceed certain percentages of the credit institutions own funds.

The Code will apply from 1 January 2011 to all credit institutions licensed and authorised by the Central Bank and will affect lending in or outside the State.  In the event that a loan entered into prior to 1 January 2011 is not consistent with the Code, the credit institution must take all steps possible to modify the loan/lending commitment so that it is, as soon as possible after 1 January 2011, consistent with the Code.

Credit institutions will be required to submit details of related party lending to the Central Bank on a periodic basis. Non compliance with the Code may be considered under the Central Bank’s Administrative Sanctions Procedure.