A revised Code of Conduct for Business Lending to Small and Medium Enterprises (“the Code”) came into effect on 1 January 2012.  It sets forth the statutory procedural requirements to be adopted by all regulated entities (i.e. banks and building societies) and is aimed at facilitating access to credit for small and medium enterprises. It does not apply to credit unions.

Objectives and Application of the Code

The stated objectives of the Code are:

• To facilitate access to credit for sustainable and productive propositions 
• To promote fairness and transparency in the treatment of SMEs by regulated entities
• To ensure that when dealing with arrears/potential arrears cases, the aim of a regulated entity is to assist borrowers to meet their obligations or otherwise deal with the situation in an orderly and appropriate manner.

The Code applies to overdrafts; loans; term loans; leasing; hire purchase; and invoice discounting. Specifically excluded from its scope is lending to other financial institutions; syndicated, club, multi-lender transactions; and special purpose vehicles including those established for a particular transaction.

Recent Revision of “Financial Difficulties” Provisions

As part of the Central Bank’s commitments under the EU/IMF programme, the “financial difficulties” provisions in the previous code have been revised. Enhanced procedures have been introduced to  assist borrowers in their endeavours to meet their obligations and, where this is not possible, to ensure that the regulated entities address all issues arising in an orderly and appropriate manner.

A borrower is considered to be in “financial difficulties” when:

1. Its credit facility is in arrears for three consecutive months, or
2. In respect of overdraft facilities, where it exceeds the approved limit on the facility for 90 consecutive days and has not engaged with the regulated entity.

When financial difficulties arise the regulated entity must advise the borrower in writing of the status of the account and the applicability of the Code and must offer an immediate review meeting to discuss the borrower’s circumstances.

A borrower in difficulties should not wait to receive formal notification of its status as a “financial difficulties” customer, but should as soon as possible contact the relevant regulated entity to inform it of its difficulties and request a meeting to discuss an alternative repayment arrangement.

Lenders Obligations

Regulated entity lenders are obliged to not only have in place, but to also implement policies and procedures to specifically assist borrowers in financial difficulties. Such policies and procedures must include:

1. The provision of clear details of such processes and how they are implemented through identification of the person(s)/section(s) specifically tasked with dealing with borrowers in financial difficulties
2. Informing the SME* of the importance of engaging with the regulated entity to address their financial difficulties and also of the type of information required to be provided for an alternative repayment arrangement assessment to be undertaken
3. Allowing for alternative repayment arrangements to be agreed, where appropriate, on a flexible case-by-case basis
4. Affording the SME borrower reasonable time from the time of classification as a financial difficulties customer to resolve the financial difficulties arising and endeavouring to agree an approach to assist the borrower where possible
5. Maintaining a record of why any SME borrower falling within the definition of financial difficulties is not treated as such and confirm such reasons to the borrower if requested

Communication

The Code further obliges regulated entities to ensure that the level of contact and communications with borrowers in financial difficulties is proportionate and not excessive and to also promptly respond to or acknowledge any requests made by the borrower to discuss the financial difficulties arising.

Regulated entities must also provide borrowers with information booklets detailing certain matters, including:

1. The procedures and timelines for dealing with financial difficulties cases
2. Clear information as to the charges that arise and the methods by which such fees or charges may be mitigated
3. An explanation of the impact of financial difficulties on a borrower’s credit rating; 
4. An outline of steps the borrower might consider to assist the process for dealing with the financial difficulties arising
5. Information regarding the borrower’s entitlement to appeal a decision on an arrangement and the timeframe involved

The information booklet must also be included on a section of the regulated entity’s website dedicated to borrowers in or concerned about financial difficulties.

Regulated entities must inform the borrower of the decision regarding an alternative repayment assessment within 15 business days of receipt all the requisite information.

The Code & Other Legal Entitlements

It is important to clarify that while regulated entities are required to comply with the Code as a matter of law, nothing in the Code prohibits a regulated entity (or any other third party) acting with all necessary speed to initiate a liquidation, receivership, examinership or other insolvency procedure where necessary or where there is evidence of fraud, terrorist connections, money laundering and/or misrepresentation. The provisions of the Code operate without prejudice to a regulated entity’s legal entitlement to enforce any agreement, including any security taken in connection with any credit agreement.

Careful consideration should be given by SMEs to potential cross-securitisation which may impact on a number of other credit facilities in an SMEs overall financial arrangements each time a new/amended credit application is made. It remains advisable for SME’s to take independent financial and legal advice when negotiating new/amended credit arrangements.

It is anticipated that a full review of the Code will be carried out during 2012 which will afford stakeholders the opportunity to engage further in the operation and effectiveness of the Code.

*  An SME is as defined as an enterprise that employs fewer than 250 persons having an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million.

Contributed by Delia McMahon