Central Bank publishes code of practice on related party lending

Date: 20 October 2010

The Central Bank of Ireland today 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. Relates parties include a director, senior manager or significant shareholder of 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 has been introduced to seek to prevent abuses arising from exposures to related parties and to address possible conflicts of interest in this area. It 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 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 prior Board approval or approval by a subcommittee of the Board established specifically to deal with related party lending where that subcommittee reports directly to the Board;
  • Actions in respect of the management of such loans (e.g. grace periods, interest roll-up, loan write-off) require prior Board approval or approval by a subcommittee of the Board established specifically to deal with related party lending where that subcommittee reports directly to the Board; and
  • Where loans to a related party exceed one million euro the prior approval of the Central Bank is required.

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. Non compliance with the Code may be considered under the Administrative Sanctions Procedure.

The Code becomes effective on 1 January 2011.

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