Earlier this year, Belgium woke up to a new landscape in protections for SME borrowers. Amendments to the SME Financing Act, originally passed by the Belgian Parliament in December 2013, came into force, extending protections for SMEs and placing heftier regulations around business lending, writes Lorenzo Migliorato.
The 2013 SME Financing Act sought to address asymmetries in information between borrower and lender during a finance agreement – for instance, by providing explanatory notes on contracts, or giving an explicit rationale for refusing an application.
It also introduced a Code of Conduct codifying fair treatment of SMEs on the part of financiers.
The act was subsequently amended to narrow the definition of SMEs – by taking into consideration parent companies’ turnovers – and to expand the protections afforded to businesses.
The 2013 Act put a cap on prepayment penalties for any facility up to €1m (£872,180), limiting them to six months’ worth of interest. The principal under which the cap applies has now been raised to €2m.
For higher principals, lenders have more freedom on penalties, but still have to adhere to a formula set out in the 2013 Code of Conduct. The formula takes into account the difference between what the lender would have earned had the loan matured, and what they are going to earn by reinvesting the repaid capital in the current interest-rate environment.
The amended act specified that the formula is only meant to set out a maximum, meaning that lender and borrower can agree to a lower amount. Should the contract contain penalties above those permitted by the SME Financing Act, courts can set an amount to their discretion, after examining the circumstances.
Among the enhanced “duties to inform” put before lenders, arguably the most noteworthy is the obligation to set out, at the point of discussion, all forms of SME financing that could fit the applicant’s case, as well as an overview on what the costs and consequences would be for each of them.
Additionally, once the contract is finalised, lenders have to hand out to borrowers, free of charge, a standardised document detailing the terms and covenants of the loan.
Only a fraction of cases are exempt from the “duty to inform” obligations, namely financings below €25,000 with no prepayment penalties or security and guarantee covenants.
The expert’s view
The 2013 Act and its amendment arose mainly from a perceived need, post-2008, for an SME-specific funding framework, according to Ivan Peeters, partner at Benelux law firm Stibbe’s Brussels offices.
“Until the financial crisis, I was not aware [of] a debate about whether there should be a different regime for SMEs compared to other borrowers,” he says.
Since the recession, case law over SME funding has been accumulating – for instance around the extent to which prepayment penalties, which the Belgian civil code already capped at six months’ interest for all loans, applied to commercial lending. The resulting body of law was eventually codified in the SME Financing Act.
Elements like the duty to inform, or the Code of Conduct, are arguably intended to reduce the need to go to court when case disputes arise. Although a judge could still be involved, that would really be a worst case scenario, not the go-to.
“It is a very severe sanction, because nobody would want to put themselves in the hands of a court,” says Peeters. Indeed, he adds, the court element is a strong incentive for lenders to ensure their conditions are Code of Conduct-compliant at the outset.
The ultimate objective of the legislation was to make the SME lending process more straightforward, and incentivise the flow of funding to the segment. However, Peeters believes it might end up having the opposite effect. “Most of the practitioners I know agree [that] from a lender’s point of view, it is just additional obligations and red tape,” he notes. “It [does] not really make banks more eager to provide lending to SMEs.
“I do not think it has a huge adverse impact, but neither do I believe it has really helped promote more lending. To me, this is [purely] SME protection legislation,” he says, adding that he can easily imagine clients lamenting the inefficacies they feel the act has created.
There is also discussion in Belgium on extending the legislation derived from the 1993 EU Unfair Contract Terms directive to apply to both consumers and small businesses.
“There are intentions to expand the broader principles to SMEs,” says Peeters. “We will try to resist them – but I do not know whether we are going to get very far.”