New rules proposed for Loans to Credit Institution Directors and Senior Management

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New rules proposed for Loans to Credit Institution Directors and Senior Management

Consultation on introduction of statutory Code on Related Party Lending The Central Bank and Financial Regulator today (Thursday 13 May 2010) issued a public consultation on lending to related parties by banks and building societies (credit institutions). Consultation Paper CP43 on Code on Related Party Lending outlines proposals to introduce a statutory code of practice in relation to lending by banks and building societies to directors, senior management, persons connected to those individual

To protect against potential abuses arising from exposures to related parties and to address possible conflicts of interest it is proposed to impose a statutory code of practice concerning lending by banks and building societies to related parties which requires that such lending is on an arm's length basis, is limited to a percentage of the institution's own funds, and is subject to appropriate and effective management oversight and limits. The consultation paper 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 prior Board approval; and
  • Action in respect of the management of such loans (e.g. grace periods, interest roll-up, loan write-off) require prior Board approval.

The proposals include the introduction of periodic reporting to the Financial Regulator to ensure compliance.

It is proposed that the Code on Related Party Lending will apply to all credit institutions licensed and authorised by the Financial Regulator. Credit institutions subject to the proposed Code will be required to comply with its terms for lending in or outside the State. Failure to comply with the requirements may be subject to sanction under the Administrative Sanctions Framework.

This consultation paper is part of a wider strategy to update the Irish regulatory framework. The Financial Regulator has recently issued a consultation paper on corporate governance and intends to issue further requirements, including remuneration requirements and a revised fitness and probity framework.

Interested parties are asked to comment on the proposals by 16 July 2010. All submissions will be published on www.financialregulator.ie. Industry comments and queries in relation to this consultation paper should be directed to the Prudential Policy Unit, International Credit Institutions at e-mail RPlending@centralbank.ie .

Article Published: 13/05/2010