The Irish banking sector is experiencing increasing levels of confidence and activity on foot of the Irish economy's continued growth and new funding sources entering the market.
New SME Regulations
The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the "SME Regulations") took effect for regulated lenders on 1 July 2016. The SME Regulations replace the Code of Conduct for Business Lending to Small and Medium Enterprises 2012 and provide additional protections to SME borrowers.
New requirements for regulated lenders under the SME Regulations include:
- providing SME borrowers with written reasons for declining credit;
- providing greater transparency around the credit application process;
- establishing and implementing an internal appeals procedure; and
- providing greater protections for guarantors.
There are also enhanced requirements that apply to 'Micro and Small Enterprises' around advertising, providing unsolicited credit and contacting borrowers in arrears.
In order to comply with SME Regulations, regulated lenders must have relevant policies, systems and procedures in place and carry out staff training.
Mandatory Credit Reporting and Credit Checking Rules – Central Bank Credit Reporting Act 2013
The Central Bank is to operate a central credit register in which personal and credit information of consumer and business borrowers and guarantors is to be recorded for qualifying loans of €500 or more.
Both regulated and unregulated lenders will be obliged to report this information to the Central Bank. Once up and running, lenders will also be obliged to consult the register before providing credit of more than €2,000.
Applicable borrowers and guarantors include consumers, individuals, sole traders, companies and other entities resident in the State.
A number of deadlines for the register have been set with the first being 31 December 2017 when the requirement for lenders (other than moneylenders or local authorities) to report information relating to consumer loans takes effect.
Default interest and penalty clauses
In 2016, the Irish High Court ruled in two connected cases[1] that the charging of default interest at 4% amounted to a penalty and was, therefore, unlawful. The court reaffirmed the position that surcharge interest rates are penal in nature where such rates could not be considered a "reasonable pre-estimate" of likely loss in the event of a default. The surcharge rate of 4% in these cases was included in the general terms and conditions applicable to a wide variety of loans and customers. It was deemed to be a generic rate that could not have been a "genuine pre-estimate of loss".
The defence had sought to rely on a UK Supreme Court decision that enforceability comes down to whether the imposition of surcharge interest is unconscionable, extravagant or "out of all proportion to any legitimate interest of the innocent party". However, the court declined to follow the decision of the UK Supreme Court, noting that it was for an appellate court to consider whether that decision should be followed in Ireland.
What's on the horizon for 2017?
Indications point to further increased domestic activity levels
in 2017, although it remains to be seen what impact uncertainty
surrounding Brexit and global political events will have. The
Central Bank's decision to relax the mortgage regulations
relating to loan-to-value along with the help-to-buy scheme should
see an increase in mortgage lending to first-time buyers.
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