Small Business Financing Code of Conduct: what is it and what can you do with it?

As of July 1, 2018, the Small Business Financing Code of Conduct came into effect. This code was drafted by the Dutch Banking Association (NVB).

The Code of Conduct sets out what small business customers can expect from a bank when they obtain financing. The code of conduct also covers the orientation phase and application phase when a financing agreement has not yet been concluded.

That all sounds great, but what exactly is the code and what can you do with it?

What is regulated by the code?

The code contains minimum standards of service. It also contains minimum standards of protection. The intent of the code is to provide clarity to the client on what to expect from the bank.

For example, the bank must inform a borrower of:

1. The duration of the funding application review process;
2. The reason for any rejection of a credit application;
3. Possible alternative forms of financing if the loan application is rejected;
4. Changes such as an interest rate revision or an early repayment option if the financing is established;

For example, the bank must also assess whether the customer can meet its financial obligations under the financing and whether the type of financing fits the customer's spending goal.

What type of financing does the code of conduct cover?

The Code of Conduct is intended for small business financing. This includes not only money loans, credit facilities or overdrafts, but also financial leasing or factoring if there is a money loan or credit facility.

An online check can be performed via the NVB website to see if the code of conduct applies to a credit application.

To whom does the code apply?

In principle, the code of conduct applies to banks that are members of NVB. Other financiers may also declare the code of conduct applicable to their services. In that case, (part of) the code also applies to them. However, it is important that the code is explicitly declared applicable, for example in the credit agreement.

Who can invoke the code?

In a nutshell, any borrower engaged in business/professional activities can invoke the code, provided the following conditions are met:

1. The consolidated annual turnover of the borrower is up to €5,000,000.00.
2. The total amount of business financing shall not exceed € 2,000,000.00.

If the borrower invests primarily in commercially leased property, the slightly different terms apply:

1. The total value of the interest in the real estate does not exceed € 2,000,000.00;
2. The total amount of business financing shall not exceed € 2,000,000.00.

What can I do if the bank does not comply with the Code?

The first step is to see if the borrower can come to an agreement with the bank's complaints department. If this fails, then the dispute can be submitted to the Financial Services Complaints Institute (Kifid). This provides a low-threshold and inexpensive alternative to going to court.

Because other financiers cannot (yet) join Kifid, complaints about these other financiers - even though the Code has been declared applicable - cannot be submitted to Kifid. In those cases, therefore, complaints must be submitted to the court.

Conclusion

The intent of the Code of Conduct is to provide clarity to the customer as to what to expect from a bank when she submits an application for financing and/or that financing is provided.

This is to be welcomed, although the added value of the code can be questioned. After all, much of what the code regulates must be done by the bank anyway, based on its duty of care. Whether the code of conduct actually adds value, therefore, only the future will tell.

Do you have questions regarding the application of or compliance with the Code of Conduct for Small Business Financing or do you have other questions regarding financing? Please contact Reinier Pijls.