This tool offers you the chance to see how jurisdictions compare for finance and investment around the world. Please select your country and legal topic area(s) of interest using the drop down menu on the left hand side of the page.

Lending and borrowing

Are there any restrictions on lending and borrowing?

Australia

Australia

Lending

While there are no general restrictions on lending, a lender may need to comply with various codes or regulations if engaging in certain lending practice, particularly if lending to individuals or consumers. The most important to note are as follows:

  • The National Credit Code applies to credit contracts entered into by natural persons or strata corporations, for personal domestic or household purposes or the purposes of residential improvement. The National Credit Code imposes a range of regulatory requirements on the lender that do not apply to loans that fall outside its scope. Those outside its scope generally include loans to companies and loans predominately for business or investment purposes.
  • The Banking Code of Practice (BCOP) of the Australian Banking Association (ABA) came into effect on 1 July 2019. It is effectively a complete rewrite of the previous 2013 Code of Banking Practice. Although the BCOP is voluntary, each ABA member bank with a retail presence in Australia is required to subscribe to the BCOP as a condition of its ABA membership. The BCOP is binding and the BCOP rules form part of the contractual relationship between the bank and its customer. The BCOP applies to specified banking services provided to individual customers, small businesses1 and guarantors and prospective guarantors in respect of a loan to an individual or small business. Affected "banking services" include bank accounts, term deposits, credit and debit cards, home and personal loans, overdrafts, bill facilities, consumer credit insurance and payment and forex services. However, "banking services" expressly excludes shares, bonds and securities, as well as financial products and services provided to wholesale customers. 
  • An Australian credit license must be held by any person engaging in the provision of consumer ‘credit activities’ (including supplying goods on credit). Licensees must comply with a number of general conduct obligations and responsible lending guidelines.
  • The Banking Act 1959 (Cth) and various legislative and prudential requirements must be adhered to for a lender to be a ‘bank’ or to operate as a deposit taking institution. A person must not hold itself out to be a ‘bank’ unless authorized to do so.

1A business is a “small business” if at the time it obtains the banking service all of the following apply:

a) it had an annual turnover of less than AUD10 million in the previous financial year; and

b) it has fewer than 100 full-time equivalent employees; and

c) it has less than AUD3 million total debt to all credit providers including:

i. any undrawn amounts under existing loans;

ii. any loan being applied for; and

iii. the debt of all its related entities that are businesses.

Borrowing

While borrowers are generally not regulated, it is advisable for a borrower to consider whether the National Credit Code or the BCOP apply to his, her or its activities, in which case various protections may be available.

Last modified 3 Dec 2019

Austria

Austria

Lending is restricted under civil law by the general principle of good morals (gute Sitten) and by the limits of laesio enormis (that is, where parties to a contract are entitled to rescind certain unfair contracts) from exploiting the carelessness, plight or inexperience of the contracting partner and charge monetary advantages that are clearly inappropriate. Extortionate loans are void and may also result in criminal liability.

Stock companies and limited liability companies are prohibited by law from granting financial assistance either in the form of a loan or credit support by providing a guarantee or other security for the purpose of purchasing its own shares. This also applies to limited liability companies in compliance with the capital maintenance rules.

Loans to managing directors may be subject to particular approval requirements.

Finally, a debt may be deemed to be of equity in nature and repayment may be forbidden if the loan was granted in the period prior to a borrower's insolvency and when borrower is insolvent and the lender either holds more than 25% of the borrower's shares or otherwise exerts control over the borrower.

There are no restrictions on granting security to a foreign lender or on a foreign lender making loans; however, engaging in banking or financial services may require a banking license. There is also a duty to notify to the Austrian Central Bank of certain cross-border business for statistical purposes.

Last modified 6 Dec 2019

Belgium

Belgium

Lending

Lending is a regulated activity in relation to mortgage credit and consumer credit (Book VII of the Code of Economic Law).

Assuming none of the available exemptions apply, mortgage and consumer credit providers need to be authorized by the FSMA to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage and consumer contracts, specific obligations apply with respect to:

  • conduct of business rules;
  • provision of information;
  • knowledge of the client/borrower; and
  • assessment of the creditworthiness of the client/borrower.

There are no additional restrictions that apply to foreign lenders making loans to Belgian borrowers.

Providing financing to a company (excluding providing consumer credit and mortgage credit to individuals for residential purposes) ("commercial lending") on a stand-alone basis does not require a licence nor any filing and/or registration.

However, specific rules of conduct apply for lending to SMEs, pursuant to the Act of 21 December 2013 on the Financing of SMEs. These rules of conduct include a duty of rigour, a duty of information, restrictions on a number of contractual terms, and a right of prepayment for the enterprise. SMEs are individuals or legal entities pursuing an economic purpose in a sustainable manner or liberal professions (eg, lawyers, notaries, etc) that have no more than one of the following criteria in their last and penultimate closed financial year: (i) 50 employees on an annual basis; (ii) annual turnover of EUR9 million; and (iii) a total balance sheet of EUR4.5 million.

Commercial lending sometimes activity requires a licence – ie, if it is undertaken in combination with deposit taking (which requires a licence as a credit institution) or if it is funded with crowdfunding (which may require a licence as a crowdfunding platform).

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 18 Dec 2019

Brazil

Brazil

Lending

Pursuant to the applicable regulation, financial institutions are prohibited to carry out credit operations with related parties, except in some limited circumstances. For this purpose, the law defines as a financial institution’s related party the following:

  • its controlling shareholders, directors and members of other statutory bodies (fiscal, advisory and others) and their respective spouses and relatives up to second degree;
  • individuals or legal entities that hold a qualified interest (as per current regulations) in their capital;
  • legal entities in which they have qualified interest (direct or indirect);
  • legal entities in which they have effective operational control or preponderance in the deliberations, regardless of the equity interest; and
  • legal entities with common directors or members of the board of directors.

The restrictions with respect to transactions with related parties do not apply to: (i) transactions carried out under conditions compatible with the common market (including, but not limited to, in respect of limits, interest rates, grace periods, guarantee requirements and risk classification criteria), which shall be similar to those conditions that the financial institution adopts in transactions with unrelated parties; (ii) arms-length transactions with entities controlled by the Union, (iii) credit operations whose counterparty is a financial institution that is part of the same prudential conglomerate, provided that they contain a subordination clause; (iv) certain interbank deposits; (v) setoff obligations; and (vi) other situations authorized by the CVM.

Moreover, there are currently certain restrictions imposed on financial institutions limiting the extension of credit to public sector entities, such as government subsidiaries and governmental agencies. These are in addition to certain limits on indebtedness to which these public-sector entities are already subject.

Borrowing

Borrowers are generally not regulated. Borrowers under consumer and housing financing usually benefit from the protection of the Brazilian Consumer Defense Code and other relevant regulations from the Central Bank.

Last modified 4 Dec 2019 | Authored by Campos Mello Advogados

Canada

Canada

Lending Banks

The operation of domestic and foreign banks is governed by the Bank Act (Canada) which requires that a bank receive authorization to carry on banking activities in Canada. The classification of the bank as a Schedule I Bank (Canadian-owned banks), Schedule II bank (foreign bank subsidiaries) or Schedule III bank (foreign banks operating through branches in Canada) determines which provisions of the Act apply to such bank.

Section 510(1) of the Bank Act (Canada) provides that:

‘Except as permitted… a foreign bank or an entity associated with a foreign bank shall not (a) in Canada, engage in or carry on (i) any business that a bank is permitted to engage in or carry on under this Act, or (ii) any other business; (b) maintain a branch in Canada for any purpose; (c) establish, maintain or acquire for use in Canada an automated banking machine, a remote service unit or a similar automated service, or in Canada accept data from such a machine, unit or service; or (d) acquire or hold control of, or a substantial investment in, a Canadian entity.’

An exemption to section 510(1) is found in section 524(1) of the Act which permits a foreign bank to establish a branch in Canada upon approval from the Minister of Finance.

A foreign bank can avoid the application of the Bank Act (Canada) while making loans to Canadian borrowers by ensuring that the bank’s activities in Canada do not amount to engaging in or carrying on business in Canada. This is a question of fact and depends on the circumstances of each individual situation.

Foreign banks may also establish Representative Offices in Canada with the required approval under the Bank Act and may promote the services of the foreign bank and act as a liaison with non-Canadian Offices of the foreign bank, but may not otherwise carry on business.

Borrowing

Borrowers are generally not regulated; however, some regulations apply if the borrower is classified as a consumer, depending on the Province’s consumer legislation.

Last modified 2 Jan 2020

Chile

Chile

Banks shall not grant credits, directly or indirectly, to one person or legal entity, for an amount that exceeds 10% of its capital; or grant credits, to one person or legal entity involved directly or indirectly to the property or administration of the bank in more favorable terms (eg interest or guarantees); or grant, directly or indirectly credit with the purpose to of habilitate a person in order to pay the bank with shares of its own issuance; or grant, directly or indirectly, credit to a director, or any other person that performs as general lawyer; and shall not become liable for obligations of third parties, but in the cases expressly stated in the law. In addition, banks are not authorized to grant mortgages or pledges over physical assets, unless these agreements are granted in order to guarantee payment of the purchase price of such assets.

In addition, suppliers of services and financial products have several obligations regarding information and marketing such as in respect of their quotes, which shall last at least 7 business days; and reporting rates, charges, commissions, costs tariffs, conditions and term of the products offered, among others.

Borrowing is not generally regulated; however, they have the benefit granted by the National Consumers Service in order to, for example, not be tied with different products or services not requested by a financial institution.

Last modified 6 Dec 2019 | Authored by BAZ|DLA Piper

Colombia

Colombia

Lending

Pursuant to applicable Colombian law, commercial banks cannot lend to a single person, directly or indirectly, a sum greater than 10% of their Tier 1 Capital (Patrimonio Técnico) if the only security for such operation is the borrower’s equity. Nevertheless, commercial banks can lend to a single person an amount equivalent to 25% of their Tier 1 Capital (Patrimonio Técnico), as long as such loan is secured by eligible collateral and sufficient to secure a risk exceeding 5% of such equity.

Notwithstanding the general rule set above regarding the lending limit of 10%, Decree 816 of 2014 was issued to promote the financing of fourth generation road concessions (Concesiones de Cuarta Generación), and establishes that commercial banks can lend to a single borrower who is pursuing a fourth-generation concession, a sum up to 25% of the Tier 1 Capital (Patrimonio Técnico).

Borrowing

Liabilities acquired by a Broker firm and intended to finance the acquisition of securities may not exceed three times its Tier 1 Capital (Patrimonio Técnico).

Last modified 20 Oct 2017 | Authored by DLA Piper Martinez Beltrán

Czech Republic

Czech Republic

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the Czech National Bank (CNB) to conduct such business.

Consumer credit is a specific area of regulation. The set of entities subject to consumer credit supervision by the CNB was recently widened with effect from 1 December 2016. Non-banking institutions can provide consumer credit only if they comply with conditions set in the Consumer Credit Act.

Consumer credit regulation pertains to:

  • consumer credit providers;
  • consumer credit intermediaries; and
  • accredited entities organizing professional examinations pursuant to the Consumer Credit Act.

There are some additional restrictions that apply to foreign lenders making loans to Czech borrowers, eg a foreign bank which wants to create a branch in the Czech Republic has to submit a special statement from the institution carrying out bank supervision in the home country of that bank.

There is also the Central Credit Register (CCR) which is an information system that pools information on the credit commitments of individual entrepreneurs and legal entities, and facilitates the efficient exchange of this information between CCR participants. The participants are each of the banks and branches of foreign banks carrying on business in the Czech Republic, as well as other persons where so provided in a special legislative act.

Borrowing

Borrowing in general is regulated in large part by the Act No. 89/2012 Coll., Civil Code, as amended. Basic provisions regarding loans and credit can be found in Sections 2390-2400.

Last modified 20 Oct 2017

Finland

Finland

Lending

Lending is a regulated activity in relation to lending to consumers. The Consumer Protection Act regulates consumer credits and the Finnish Competition and Consumer Authority supervises lending to consumers.

Consumer loans are subject to a range of regulatory requirements. For example, there are particular restrictions around:

  • how the loans are marketed;
  • how to deal with borrowers who fall behind with their payments; and
  • how payments may be claimed from the consumers.

Borrowing

Borrowing is generally not regulated in Finland. However, certain borrowers may benefit from specific protection provided to them under Finnish law (for example consumers).

Last modified 26 Nov 2019

France

France

Lending

If the lending activity is performed on a regular basis, the lender must be authorized.

Borrowing

Borrowing is generally not regulated. However, depending on the circumstances, borrowers should insure that lenders are duly licensed.

Last modified 4 Dec 2019

Germany

Germany

Lending

Lending business is qualified as licensable banking business and subject to prior authorization by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)).

Borrowing

Borrowing does not constitute a regulated activity in Germany.

Last modified 20 Oct 2017

Ghana

Ghana

Requirement for license 

Banks and specialized deposit-taking institutions and non-bank financial institutions require a license from the Bank of Ghana to carry on the business of lending. 

Banks and specialized deposit-taking institutions 

Certain restrictions apply to banks and specialized deposit-taking institutions regarding lending. They are prohibited from: 

  • granting an advance, loan or credit facility including a guarantee against the security of (i) their shares; (ii) shares of the financial holding company; or (iii) shares of a subsidiary of the financial holding company;
  • taking financial exposure in respect of a person or a group of connected persons which constitutes in the aggregate, a liability amounting to more than 25% of their net own funds or a lower percentage that the Bank of Ghana may prescribe;
  • taking an unsecured financial exposure in respect of a person or a group of connected persons in excess of 10% of their net own funds;
  • granting or permitting to be outstanding, a financial exposure in respect of an affiliate or an insider which are preferential in any respect including creditworthiness, term, interest rate and value of the collateral;
  • taking a financial exposure in respect of an affiliate if the aggregate of financial exposure to the affiliate exceeds 25% of the net own assets;
  • taking a financial exposure in respect of related parties and their related interests if the aggregate of the financial exposure exceeds 20% of the net own funds;
  • taking an unsecured financial exposure in excess of 10% of their net own funds;
  • taking a financial exposure in respect of an insider and the related interest of the insider if the aggregate of the financial exposure exceeds 10% of its net own funds;
  • taking an unsecured financial exposure in respect of an insider and the related interests of that insider in excess of 5% of their net own funds;
  • lending on preferential terms to an employee unless the lending is part of a formally approved employment package or employment benefit plan;
  • providing an unsecured advance on or credit facility to an employee the aggregate amount of which exceeds two years’ total emoluments of the employee; and
  • granting an aggregate amount of loans on preferential terms both secured or unsecured, in excess of 20% of their net own funds. 

Non-bank financial institutions 

Non-bank financial institutions are also prohibited from: 

  • granting an advance or credit or issuing financial guarantee or indemnity to or in respect of any person or group of persons which constitutes in the aggregate a liability to the institution amounting to more than the proportion of the net worth of the institution;
  • granting an unsecured advance, credit, or issuing any guarantee or indemnity amounting in aggregate to more than the proportion of the net worth of the institution;
  • granting to any of its officers or employees an unsecured advance or credit facility, the aggregate amount of which exceeds two years’ salary of the officer or employee;
  • assuming unsecured financial exposure in respect of (i) any of its directors or significant shareholders, (ii) a firm or company in which a director or a significant shareholder of that institution is interested as director, (iii) a controlling shareholder, partner, proprietor, employee or guarantor of that institution, (iv) a holding or subsidiary company of that institution in which a director is interested, or (v) a director’s relative or a significant shareholder’s relative, unless the prior written approval of the Bank of Ghana is obtained in respect of that unsecured exposure;
  • assuming a financial exposure in respect of a director or a significant shareholder or other related party in  excess of (i) 15% of the institution’s net own funds where the financial exposure is on a secured basis, or (ii) 10% of the institution’s net own funds where the financial exposure is on an unsecured basis; and
  • writing off or waiving fully or partially, the financial exposure of the institution to a director, a significant shareholder and other related party without the approval of the institution’s board and the approval in writing of the Bank of Ghana. 

Protection against discrimination 

The Borrowers and Lenders Act, 2008 (Act 773) prohibits a lender from discriminating against a person on the grounds of race, gender, ethnicity, political affiliation or religion in: (a) assessing the ability of the person to meet the obligations of a proposed credit agreement; (b) deciding whether to refuse an application to enter into a credit agreement, or to offer or enter into a credit agreement; (c) determining an aspect of the cost of a credit agreement to the borrower; (d) proposing or agreeing on the terms and conditions of a credit agreement; (e) assessing or requiring compliance by the person with the terms of a credit agreement; (f) exercising any right of the lender under a credit agreement, Act 773 or any legislation relating to credit; or (g) determining whether to continue, enforce, seek judgment as regard a credit agreement or terminate a credit agreement. 

Protection of borrower credit rights 

Where a borrower exercises a right under the Borrowers and Lenders Act, 2008 (Act 773) the lender is prohibited from responding by: (a) penalizing the borrower; (b) altering, or proposing to alter the terms or conditions of a credit agreement with the borrower to the detriment of the borrower; or (c) taking an action to accelerate, enforce, suspend or terminate a credit agreement with the borrower. A dissatisfied borrower may have recourse to the complaint procedures and redress mechanisms provided under the central bank’s Consumer Recourse Mechanism Guidelines for Financial Service Providers, 2017. 

Borrowing 

The following restrictions apply to the entities indicated below:

Banks, specialized deposit-taking institution or financial holding company

A bank, specialized deposit-taking institution or financial holding company which has a capital adequacy ratio of less than the ratio prescribed by the Bank of Ghana is prohibited from receiving a loan from another bank, specialized deposit-taking institution or financial holding company without written approval from the Bank of Ghana.

Statutory Corporations and State-Owned Enterprises

The written approval of the Minister responsible for Finance is required for a public corporation or state-owned enterprise to borrow from a foreign market or to borrow an amount above the limit determined by the minister.

Local Government Authorities

A local government authority may borrow funds only from within Ghana and up to the limit determined by the minister responsible for finance in consultation with the minister responsible for local government. The prior written approval of the minister responsible for finance is required for the borrowing above the determined limit.

Government of Ghana

The terms and conditions of all government borrowings require parliamentary approval. The minister for finance may subject to parliamentary approval, enter into and execute an agreement on behalf of the government in relation to matters of a financial nature. 

Government borrowing from banks and financial institutions under a loan agreement must be based on the annual borrowing plan.

Last modified 15 Jan 2020 | Authored by Reindorf Chambers

Hungary

Hungary

Lending

Lending in a business-like manner is a regulated activity in Hungary, therefore a lender will need to be authorized by the National Bank of Hungary to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

Regulated credit agreements on the other hand have specific requirements regarding how the agreement is drafted and formatted and what information must be included.

There are no additional restrictions that apply to foreign lenders making loans to Hungarian borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 20 Oct 2017

Italy

Italy

Lending

In general terms, under Article 106 of the Consolidated Banking Act the granting of loans in any form is reserved to duly authorized financial intermediaries enrolled with a Register kept by the Bank of Italy.

Specific exclusions are set forth in Ministerial Decree No. 53 of 2015, as well as cases in which the granting of loans is not considered as performed vis-à-vis the public.

In addition, loans can be granted also by Italian special purpose vehicles incorporated pursuant to the Italian Securitization Law. Such SPVs can carry out lending activity in the context of securitisation transactions, both in performing and non-performing scenario, in accordance with the specific requirements and limits set out under the Italian Securitization Law.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether the consumer-lending regime applies to their activities, in which case they will benefit from some additional protections and benefits (such as, for example, in terms of limitations to unilateral amendments by the finance party and transparency rules).

Last modified 22 Jan 2020

Japan

Japan

Lending

Lending is a regulated activity. In general, a lender will need to obtain a moneylending business license or certain other licenses such as a banking license. Though the application of the Money Lending Business Act (for instance, the requirement to hold a moneylending business license) to a foreign company lending money from outside Japan to a party inside Japan is not very clear, it would be prudent for a foreign company to obtain a moneylending business license.

To obtain a moneylending business license, an entity must satisfy certain requirements. For instance, a company must:

  • have minimum net assets of JPY50 million;
  • have at least one office in Japan;
  • have at least one director with at least three years of experience in moneylending operations;
  • not conduct any operations against public benefits;
  • in respect of each office it operates, have ‘full-time chiefs of moneylending operations’ who have passed a required examination and registered with the relevant regulatory authorities (the ratio of the ‘number of chiefs of moneylending operations’ against the ‘number of persons engaged in money lending operations’ must be 0.02 or more); and
  • in respect of each office it operates, have at least one full-time director or employee who has at least one year of experience in moneylending operations.

Certain of the requirements above can restrict the ability of a foreign company to obtain a moneylending business license.

Borrowing

Borrowing is generally not regulated.

Last modified 5 Dec 2019

Luxembourg

Luxembourg

Lending

Lending is a regulated activity in Luxembourg except, generally, in the following instances:

  • one-off and ancillary lending activities;
  • intra-group loans; or
  • loans granted to a ‘restricted circle of previously known persons’ (cercle restreint de personnes préalablement connues), which are not considered as granted to the ‘public’, which is generally defined as a multitude of non-identifiable persons.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to other loans. For example, for regulated consumer loan contracts:

  • the consumer must have at his disposal the information which will enable him to make his decision with full knowledge of the facts;
  • before concluding the credit agreement, the credit institutions must assess the consumer’s creditworthiness on the basis of a sufficient number of items of information; or
  • the consumer is allowed to withdraw from the credit agreement without stating any reason within the period of 14 calendar days after the execution of the credit agreement.

Finally, a public limited liability company or a partnership limited by shares cannot advance monies, grant a loan, guarantee or security for the purchase of its own shares, subject to completing a whitewash procedure.

Borrowing

While borrowers are generally not regulated, borrowers should consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

For legal entities, borrowing should be permitted under its corporate object.

Last modified 10 Dec 2019

Mauritius

Mauritius

Lending 

Lending by way of business is a regulated activity and requires a license from the Bank of Mauritius. 

Borrowing 

Borrowers are not regulated. However, credit facilities not exceeding MUR 3 million (approximately USD82,000) are regulated by the Borrower Protection Act 2007.

Last modified 6 Dec 2019 | Authored by Juristconsult Chambers

Mexico

Mexico

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the National Banking and Securities Commission to conduct such business. The main provisions regulating these activities aim at protecting financial services users, strengthening competition in banking services, and giving the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) powers to supervise and impose sanctions.

There are no additional restrictions that apply to foreign lenders making loans to Mexican borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 5 Dec 2019

Morocco

Morocco

Lending

The execution of usual credit transactions requires that the institution concerned has been authorised under the terms of an authorization issued by Bank-Al-Maghrib.

Once authorization has been obtained, any bank wishing to carry out credit operations must comply with a certain number of rules and obligations, both internally, in particular by complying with prudential ratios, and with regard to its client, in particular by exercising a duty of vigilance.

Borrowing

Borrowing is generally not regulated.

Last modified 6 Jan 2020

Netherlands

Netherlands

Lending

The following lending activities require, in principle, authorization:

  • providing banking activities, including lending;
  • offering, directly or indirectly, credit to a consumer and managing or performing a credit agreement with a consumer;
  • performing advisory services to a consumer in relation to credit;
  • providing brokerage services to a consumer in relation to credit; and
  • crowdfunding activities.

Borrowing

The following borrowing activities require, in principle, authorization:

  • providing banking activities, including borrowing;
  • crowdfunding activities; and
  • attracting, obtaining or having the disposal of ‘callable funds’.

Callable funds is a term used by the Dutch legislator that includes deposits and other repayable funds as entailed in the definition of a credit institution under the Capital Requirements Regulation (Regulation (EU) 575/2013). No authorization, but an exemption is required for financial entities in this regard. With this exemption, financial entities can for example give out bonds to the public which would normally be covered by a restriction on these activities for which authorization is required. After obtaining authorization, additional requirements and/or restrictions will be applicable (eg know-your-customer requirements and provision of (pre-) contractual information to customers).

Last modified 6 Dec 2019

New Zealand

New Zealand

Lending

Yes.

The Credit Contracts and Consumer Finance Act 2003 places restrictions on advertising content related to consumer loans. The Responsible Lending Code imposes on lenders of consumer finance and credit contracts obligations to abide by when issuing loans.

Financial institutions do not have to be registered banks in order to take deposits and make loans.

Banks may face restrictions on residential home loan lending due to Loan to Value Ratio (LVR) restrictions imposed via bank registration conditions. These restrict banks on the amount of low deposit lending they can do. Note that this only applies to residential investment and would exclude commercial transactions.

Borrowing

When borrowing money secured over residential homes by mortgage, certain LVR restrictions exist. These restrictions specify the minimum deposit requirements when buying an owner-occupied property to live in or when buying residential investment property. Certain exceptions do apply.

Non-bank deposit takers must comply with the Non-Bank Deposit Takers Act 2013.

Last modified 13 Dec 2019

Norway

Norway

Lending

Lending is a regulated activity, and unless the available exemptions apply, a lender will need to be authorized by the Norwegian Financial Supervisory Authority (FSA) to conduct such business. There are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

Foreign lenders may conduct business in Norway by establishing Norwegian subsidiaries and having these apply for authorization from the FSA. Special rules apply for entities that are authorized and seated in another European Economic Area state. Such entities may conduct business in Norway by passporting their licenses to Norway or through a branch.

Norwegian company law contains restrictions as to financial assistance. Section 8-7 of both the Private Limited Liability Companies Act of 1997 and the Public Limited Liability Companies Act of 1997 limit a Norwegian limited liability company's ability to grant credit for the benefit of its shareholder or a party closely related to a shareholder, or for the benefit of a shareholder of another company in the same group or any of its closely related entities. Such credit may only be granted:

  • within the limits of the assets which the company may legally use for distribution of dividends (free equity); and
  • if adequate security is furnished for the claim for repayment or recovery or within companies in the same group of companies.

There are certain exceptions to the rule mentioned above. The following credit may be granted outside the limits of the assets which the company may legally use for dividends:

  • credit of customary duration in connection with commercial agreements;
  • credit or security for the benefit of the parent company or other group company; and
  • credit or security in favor of a legal person that has a controlling interest as set out in section 1-3 over the company, or in favor of a subsidiary of such a legal person, provided that the credit or security serves the group's economic interests.

Note that the requirement concerning adequate security shall not apply if the legal person is a state, municipality or county municipality.

Section 8-10 of both the Private Limited Liability Companies Act and the Public Limited Liability Companies Act limit a Norwegian limited liability company's ability to provide financial assistance or security in connection with the acquisition of shares in that company or any of its holding companies.

Borrowing

Borrowing is generally not regulated in Norway.

Last modified 20 Oct 2017

Peru

Peru

Lending

Lending is only a regulated activity if it is conducted using public money (defined as deposits obtained from individuals). Under these circumstances, a lender will need to be authorized by the Superintendence of Banking, Insurance and Private Pension Fund Management Companies (SBS) to conduct such business.

Financial operations conducted using public money are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular regulations relating to the provisions of corresponding loan agreements, including the amount to be lent and the total exposure that banks and financial entities should have for these types of loans.

Additionally, regulated credit agreements have specific requirements regarding drafting and forms and the information to be included therein.

In relation to the interest rates, through Circular Letter 018-2019-BCRP, the Central Reserve Bank of Peru established that financial system operations are determined by free competition in the financial market.

On the other hand, for individuals and companies that are not part of the financial system, the maximum conventional compensatory interest rate is mandatory as set forth in the Peruvian Civil Code and the Central Reserve Bank of Peru. The maximum conventional compensatory interest rate is established on a daily basis by reference to the average rate of the financial system for credits to be granted to small-companies (microempresas).

There are no additional restrictions applying to foreign lenders making loans to Peruvian borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the above-mentioned protections.

Last modified 5 Dec 2019 | Authored by DLA Piper Pizarro Botto Escobar

Poland

Poland

Lending

The grant of loans is not a regulated activity. However, lenders that grant loans must comply with civil law provisions relating to loans and collateral.

Consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

There is a set of regulations which defines caps on interest and non-interest costs that may be charged by lenders in connection with consumer loan agreements.

The EU Mortgage Credit Directive (2014/17/EU) is being implemented into Polish law through adoption of the Act on Mortgage Credit (Ustawa o kredycie hipotecznym). The Act on Mortgage Credit will apply the above-mentioned restrictions to mortgage credits.

In addition, regulated credit agreements have specific requirements around how the agreement is drafted and formatted and what information must be included.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether they are subject to consumer credit regulations.

Last modified 6 Dec 2019

Portugal

Portugal

Lending

Under Portuguese law, home mortgage loans and consumer lending are regulated activities. Only credit institutions and financial companies can carry out such credit operations and therefore the lender (credit institution or financial company) will need to be authorized by the Bank of Portugal to conduct such business.

Home mortgage loans are subject to specific rules (eg early repayment rules). Credit institutions have the obligation to inform consumers about the calculation of the effective interest rate (TAE), any promotional conditions and early repayment conditions.

Regulated credit agreements are subject to specific requirements regarding the terms of the agreement. Prior to the execution of a regulated credit agreement, the lender must assess the solvency of the consumer borrower.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to them, as they may benefit from the protections mentioned above.

Last modified 6 Dec 2019

Puerto Rico

Puerto Rico

Lending

With the exception of lending under the Financial Intermediary Act, lending is only a regulated activity in relation to mortgages and consumer lending (e.g. small loans, credit cards and financial leasing). In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the Office of the Commissioner of Financial Institutions of Puerto Rico (OCFI) to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis;
  • to deal with borrowers who fall behind with their payments; and
  • foreclosure procedures.

Regulated credit agreements on the other hand have specific requirements around how the agreement is drafted and formatted and what information must be included.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 11 Dec 2019

Romania

Romania

Lending

Professional lending is a regulated activity, which may exclusively be undertaken by regulated entities. Depending on the type of loans being granted, various specific requirements or limitations should be considered.

By way of example, mortgage loans for real estate investments (credite ipotecare pentru investitii imobiliare) can be granted only by certain regulated entities (eg universal banks or mortgage loan banks). Moreover, the credit agreement for such type of loans must include certain information expressly required by law. There are also particular requirements on how to deal with borrowers that fall behind with their payments.

Specific rules are also provided under the law on consumer loans.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer-lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 20 Oct 2017

Russia

Russia

Lending

A credit agreement in Russia can take two forms:

  • a credit facility agreement (the creditor can only be a bank or other credit organization, and the subject matter of such agreement can only be monies); or
  • a loan agreement (the creditor can be any other non-credit organizations, including individuals, and the subject matter of such agreement can be monies or other things of general description or securities).

A loan agreement where a creditor is an individual is considered concluded only after monies or other things of general description are transferred to the other party, not after its execution. In other cases such contracts shall be deemed to be concluded on their execution date.

Not all forms of lending activities are regulated, such as loans between individuals.

However, in order to perform operations related to lending activities, the banks and non-banking credit organizations are required to obtain a license from the Central Bank of the Russian Federation (CBR).

Professional consumer lending is only allowed for credit organizations and a number of non-credit financial organizations specified in the law (microfinance organizations, credit cooperatives and pawnshops) and included in a relevant list by the CBR. There are also regulatory requirements stated in the Federal Law 'On Consumer Credit (Loan)' that apply to such professional consumer lenders.

Federal Law 'On Consumer Credit (Loan)' sets out restrictions on credit agreements secured by mortgage which are entered into by a borrower with a non-business related purpose, such as restrictions on the maximum amount of penalties and the amount of the total charges for the credit agreement.

Borrowing

While borrowing is generally not regulated, it is advisable for borrowers to consider whether either the consumer lending or mortgage regimes apply to their activities, in which case they will benefit from the protections mentioned above.

However, the law states some specific restrictions in respect of borrowing, such as:

  • an individual declared bankrupt cannot borrow without indicating this fact to the counterparty for five years; and
  • there is a general prohibition on borrowing for management companies of investment funds.

Last modified 5 Dec 2019

Singapore

Singapore

Lending

Although lending itself is not regulated, the business of lending is regulated by the Moneylenders Act. Except for banks, finance companies, merchant banks, pawnbrokers, and cooperative societies, every person who carries on the business of moneylending must be licensed under the Moneylenders Act. Such lenders (including banks or moneylenders) will need to be authorized by the Monetary Authority of Singapore or the Ministry of Law to conduct such business.

There are no specific requirements around how the agreement is drafted and formatted and what information must be included.

There are no additional restrictions that apply to foreign lenders making loans to Singapore borrowers from a Singapore law perspective. However, banks in Singapore that lend Singapore dollars to non-resident financial institutions for any purpose whether in Singapore or elsewhere are subject to restrictions on the amount that they can lend.

Specific restrictions on lending apply to the purchase of real property, as follows:

  • An absolute limit of 35 years on the tenure of all loans for residential property, applies to loans to both individual and non-individual borrowers, as well as refinancing loans, from 6 October 2012.
  • The Monetary Authority of Singapore will lower the loan-to-value ratio (LTV) for new residential property loans to borrowers who are individuals if the tenure exceeds 30 years or the loan period extends beyond the retirement age of 65 years. For these loans, the LTV limit will be:
    • 40% for a borrower with one or more outstanding residential property loans; and
    • 60% for a borrower with no outstanding residential property loans.
  • The LTV for residential property loans to non-individual borrowers from 50% to 40%.

Further, under the Total Debt Servicing Ratio framework, property loans extended by a financial institution should not exceed a Total Debt Servicing Ratio threshold of 60%. Property loans in excess of the Total Debt Servicing Ratio threshold of 60% should only be granted on an exceptional basis (or unless otherwise exempted under the Total Debt Servicing Ratio framework) and financial institutions should clearly document the basis for granting property loans in excess of the Total Debt Servicing Ratio threshold of 60%.

Borrowing

There are specific restrictions on borrowing for unsecured credit an individual:

  • 24 times monthly income from 1 June 2015;
  • 18 times monthly income from 1 June 2017; and
  • 12 times monthly income from 1 June 2019.

Financial institutions will not be allowed to grant further unsecured credit to an individual whose unsecured borrowings exceed the prevailing borrowing limit for three consecutive months.

Further, the Monetary Authority of Singapore has issued a consultation paper on 30 September 2016 proposing to disallow financial institutions from granting new unsecured credit facilities or credit limit increases to individuals whose outstanding unsecured debt already exceeds 12 times their monthly income. The Monetary Authority of Singapore has stated in the consultation paper that it intends to implement the changes on a prospective basis from 1 June 2017.

Last modified 20 Oct 2017

Slovak Republic

Slovak Republic

In general, lending and borrowing in Slovakia are regulated by the Civil Code (which regulates loans) and by the Commercial Code which regulates credits). Special regulation may apply with respect to special types of loans or credits, such as, for instance, consumer credits.

Lending

Provision of loans or credits does not fall under the supervision of the National Bank of Slovakia, unless a loan or credit comes from financial resources acquired from third persons on the basis of a public call. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the National Bank of Slovakia to conduct such business.

Public call means any announcement, offer or recommendation made by any person to collect funds for their own benefit or the benefit of a third party done by any means of publication, including personal contact with several persons, whether with individual persons or simultaneously with multiple parties. An announcement, offer or recommendation made solely through personal contact and to no more than ten persons is not considered a public call.

Housing loans provided to consumers are regulated by the Act on Housing Loans which regulates the information that needs to be provided to the consumer before the conclusion of the contract for a housing loan, the process of credit assessment, the consequences of breaching the obligations of the parties, as well as the obligations of financial agents and financial advisors.

Consumer loans and credits

Consumer loans and credits are subject to the requirements provided in the Act on Consumer Credits and Other Credits and Loans for Consumers which sets the requirements for:

  • the information that needs to be provided to the consumer before the conclusion of the contract for a housing loan;
  • the information that may be used in advertising consumer loans and credits;
  • the process of credit assessment;
  • the obligations of the creditors, as well as the information contained in the list of creditors which is maintained by the National Bank of Slovakia;
  • the form and content requirements applicable to consumer credit contracts and the consequences of non-compliance;
  • the mechanism for calculation of the annual percentage rate; and
  • the obligations of the financial agents and financial advisors.

Mortgage loans and municipal loans

Housing loans are loans provided only to consumers for the purposes of purchasing residential property. Mortgage loans are generally provided on the basis of the Act on Banks and may be granted to any party (provided that the conditions stipulated in the Act on Banks are fulfilled). However, a mortgage loan will still be considered a housing loan if provided to consumers for the purposes of purchasing residential property.

Mortgage loans and municipal loans are regulated by the Act on Banks and are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular requirements for:

  • the maturity period;
  • the purposes of such mortgage contract; and
  • the financing of such mortgage contract.

According to the Act on Banks, a bank may not provide a loan or guarantee liabilities under a loan for:

  • any acquisition of shares it issued;
  • any acquisition of shares issued by a person who holds a qualified interest in the bank;
  • any acquisition of shares issued by legal persons who control or are controlled by persons holding a qualified interest in the bank;
  • any acquisition of shares issued by legal persons controlled by the bank; and
  • the repayment of another loan granted for any of the above acquisitions of shares or to guarantee liabilities under such a loan.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 6 Dec 2019

South Africa

South Africa

Lending

Unless exempted, lenders are required to be registered as credit providers and financial service providers with the applicable regulatory bodies.

Lending to individuals and/or juristic entities which fall within the scope of the National Credit Act (due to their lower level of annual turnover and asset value) is subject to greater regulatory scrutiny as the information that is required to be provided to those borrowers prior to entering into a credit is more extensive. The agreements also need to follow a prescribed format and must include certain prescribed information. There is a heavy onus on lenders in these circumstances to ensure that a borrower will not be over-indebted as a result of the credit made available by the lender to that borrower. A court may declare a contract which does not comply with the prescribed format unlawful and a lender will therefore not be able to enforce its rights thereunder.

All financial institutions are required to complete the necessary 'know-your-client' procedures in terms of the Financial Intelligence Centre Act before providing finance to a borrower. In relation to companies, these procedures involve the collection of information regarding the directors and shareholders of that company, ensuring that the company is duly registered in its jurisdiction of incorporation and that the company has filed the necessary tax returns for the preceding tax years.

Lending to state-owned enterprises and other government agencies is subject to a separate legislative regime. State-owned enterprises are created by statute and the provision of finance to those state-owned entities will need to comply with the provisions of the legislation which governs that entity as read together with the Public Finance Management Act.

Borrowing

Borrowers are generally not restricted by legislation from borrowing. There may, however, be restrictions contained in the particular borrower's constitutional documents with regards to the incurral of financial indebtedness. A detailed review of the borrower's constitutional documents should always be a prerequisite to providing financing.

Also, in relation to the provision of financial assistance, see Giving and taking guarantees and security

Last modified 5 Dec 2019

Spain

Spain

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, a lender that is not a credit institution or other entity registered with the Bank of Spain is required to register on a special administrative public registry before its commencing such lending activity (for foreign entities, the relevant registry is the State Registry created for this purposes within the Consumer General Directorate, or Dirección General de Consumo). There is no prior licensing requirement so this is a simple registration process.

Mortgage and consumer financing agreements are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

Furthermore, regulated financing agreements have specific requirements around the information that shall be provided to the borrowers before the execution of the loan and during its life, how the agreement is drafted and formatted and what information must be included. In addition, borrowers under mortgage and consumer loans enjoy certain rights that they do not enjoy in case of non-regulated loans.

As far as exchange control regulations are concerned, there will be reporting requirements to the Bank of Spain on a Spanish resident who receives funds from a non-Spanish resident. The Spanish resident must comply with such reporting requirements (for statistical and information purposes only), if any, on a periodic basis. The timing of the reporting obligations depend on certain thresholds.

There are no additional restrictions that apply to foreign lenders making loans available to Spanish borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 5 Dec 2019

Sweden

Sweden

Lending

Lending (as such, without deposit-taking) is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the Swedish Financial Supervisory Authority (Finansinspektionen) to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to other loans. For example, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 22 Jan 2020

Thailand

Thailand

Lending

Lending is generally not a regulated activity unless the lending activity ordinarily carried out by certain business operators such as the financial institution, securities company or regulated non-bank business operators providing consumer-related loans eg personal  loan, nano finance and credit card business which is regulated by BOT or pico finance which is regulated by the FPO.

The general restrictions on lending relate to interest rate and debt collection activities.  The maximum interest rate for lending is 15% per annum unless certain cases apply such as a loan provided by financial institutions or a consumer loan. Violation to the maximum interest rate could result in voidance of the interest rate plus separate criminal penalty.

Under Thai law, directors have a general duty to apply the diligence of a careful businessman in their conduct of a company's business. Adequate corporate benefit must be shown by the directors to derive from the company lending or that such lending is for the best interest of the company and necessary in the ordinary course of the business. The safe approach is often to have the members of the company approve the lending by resolution.

Borrowing

Borrowing is not a regulated activity. However, borrowing limits may apply in certain situations. For example, if the borrower has been granted certain incentives, such as under the promotional investment scheme of the Board of Investment of Thailand or it has obligations regarding financial indebtedness under contractual agreements.

If the borrower is a retail consumer, the borrower will benefit from protections under certain laws concerning personal loans, nano finance, pico finance and consumer protection.

Last modified 4 Apr 2020

Ukraine

Ukraine

Lending

Generally, lending is a regulated activity only in relation to consumer lending. Lending made available to borrowers by financial institutions at the expense of attracted funds are also regulated. The lender (being a bank or financial institution) must be authorized by the National Bank of Ukraine or Financial Authority. Corporates and individuals may rely on statutory exemption.

Borrowing

Borrowing is generally not a regulated activity but note that consumer borrowers are afforded more beneficial legal protection than other borrowers.

Last modified 24 Jan 2020

UK - England and Wales

UK - England and Wales

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the UK Financial Conduct Authority to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • borrowers who fall behind with their payments are dealt with.

Regulated credit agreements on the other hand have specific requirements around how the agreement is drafted and formatted and what information must be included.

There are no additional restrictions that apply to foreign lenders making loans to UK borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 6 Dec 2019

UK - Scotland

UK - Scotland

Lending

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the UK Financial Conduct Authority to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

  • the loans are marketed, originated and sold;
  • lenders administer the loans on an ongoing basis; and
  • to deal with borrowers who fall behind with their payments.

Regulated credit agreements on the other hand have specific requirements around how the agreement is drafted and formatted and what information must be included.

There are no additional restrictions that apply to foreign lenders making loans to UK borrowers.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 20 Oct 2017

United Arab Emirates

United Arab Emirates

Lending

Licensing requirements in the UAE

The Central Bank of the UAE (Central Bank) and the Securities and Commodities Authority (SCA) are the main regulatory bodies for financial services in the UAE (except in the DIFC and ADGM) . Pursuant to Federal Law No. 14 of 2018 (New Banking Law), the Central Bank regulates financial institutions, including those who wish to provide financing in or from onshore UAE.

Lenders including commercial banks, investment banks, investment companies, finance companies, Islamic banks, Islamic finance companies and real estate finance companies are regulated by the Central Bank and require a license. .

In order to obtain a license from the Central Bank to carry out one or more licensed financial activities , a letter of application, certain corporate documents of the applicant and a business plan are submitted to the Central Bank. The specific documents required for the license are not listed by the Central Bank but the applicant should expect to be notified if additional documents are necessary for the process to be finalized. The New Banking Law provides that the Central Bank should issue its acceptance within 60 working days from the date all documents and conditions are met. If the applicant does not receive a decision within 60 working days, then this would mean the Central Bank has rejected the application.

UAE lenders who enter into financial arrangements with a borrower in the UAE without a license may face imprisonment and/or a fine and the relevant institution may be liable for civil and criminal claims.

 

Licensing requirements in the Dubai International Financial Centre (DIFC)

The principal regulator for regulating financial services within the DIFC is the Dubai Financial Services Authority (DFSA). An individual or entity based in the DIFC which provides a financial service must be authorized by the DFSA by obtaining the appropriate license.

An entity who wishes to satisfy the eligibility requirements in the DIFC must be structured as any one of the following forms of business: limited liability company; company limited by shares; limited liability partnership; protected cell company; investment company; branch of foreign company or partnership; or special purpose company.

The consequences of licensing violations can be severe. If a lender does not satisfy the requirements, then the DFSA (under the regulatory law and DFSA's Enforcement Rulebook) can enforce the following actions as punishment:

  • a fine of US$100,000 per contravention; damages or restitution;
  • injunctions and restraining orders; corporate penalties – unlimited fines through the Financial Markets Tribunal (FMT); and
  • a banning order through the FMT.

As a consequence of violating the Financial Services Prohibition section of the regulatory law, lenders will also face censure by way of publication of any enforcement action leading to critical reputational damage and the loan arrangement may also be considered unenforceable.

Borrowing

Mortgage for property

In the last quarter of 2013 the Central Bank issued set of regulations (Regulations) on mortgage lending which defines the eligibility of various categories of borrowers based on a loan-to-property value ratio (LTV). The primary aim of the Regulations is to ensure that banks, finance companies and other financial institutions providing mortgage loans to UAE nationals and expatriates do so in accordance with best practice and have control frameworks in place. The Regulations applies without exemption to banks and institutions providing Shari’a-compliant loans for the purchase of properties. 

Whether these Regulations would still be in force or new set of regulations would be issued by the UAE Central Bank following the implementation of the New Banking Law, remains to be seen. As of now, these Regulation would appear to continue to apply as they are still made available to banks in the Central Bank’s website.Pursuant to these Regulations, the following LTV requirements apply.

UAE nationals (inclusive of Gulf Corporation Council (GCC) nationals)

  • Properties >AED 5 million, the LTV = 80% of the property value
  • Properties <AED 5 million, the LTV = 70% of the property value
  • Off-plan properties, the LTV = 50% of the property value

Each borrower is only entitled to seek a loan for one property falling within these two categories and therefore it would appear that these LTV ratios are intended for owner occupiers.

If UAE nationals seek loans for a second home or investment property, the LTV must not exceed 65% of the value of the property.

Non GCC nationals

  • Properties >AED 5 million, the LTV = 75% of the property value
  • Properties <AED 5 million, the LTV = 65% of the property value
  • Off-plan properties, the LTV = 50% of the property value

Each borrower is limited to one loan for the purchase of properties within these categories.

In the event of a second home or an investment property purchase by a non-UAE national, the Regulations state that the maximum loan available will be 60% of the value of the property.

UAE Law No. 2 of 2015 concerning Commercial Companies provides that shareholders in LLCs can pledge security, and that such pledges must be made in accordance with the company's memorandum and articles of association, and be notarized. For more information, see Giving and taking guarantees and security

Last modified 23 Jan 2020

United States

United States

Lending

The amount of regulation a lender faces will depend on the type of product (consumer or commercial) and the type of collateral securing the product (real estate or non-real estate). Consumer loans are more heavily regulated than commercial loans, with consumer loans secured by real estate being the most heavily regulated on both the federal and state level and unsecured commercial loans being the least regulated. That being said, it is unlikely for any credit product offered in the US to be completely unregulated in all states and jurisdictions.

Below are some general restrictions on lending.

Prohibition on unsafe and unsound banking practices

The Federal Deposit Insurance Act (FDI Act) prohibits federally and state-chartered banks and thrift institutions from engaging in unsafe and unsound banking practices, including those relating to banks’ lending activities. Regulators can impose corrective measures, including cease-and-desist orders or termination of the bank’s deposit insurance coverage for a bank engaging in any unsafe or unsound banking practices.

Capping of interest rates

State usury laws, which may apply to both federally and state-chartered banks, impose limitations on the interest rates that banks may charge for consumer and commercial loans.

Limits on loans to one borrower

Federal law caps the amount of credit that national banks are permitted to extend to one borrower or to a group of related borrowers, subject to specific exceptions which are tailored to the nature and type of loan. Some states have comparable limitations.

Restrictions on lending to affiliates

Federal law restricts lending and other extensions of credit by a bank directly or indirectly to its affiliates by setting quantitative limitations on a bank’s transactions with any single affiliate, and with all affiliates combined, and by setting forth collateral requirements for certain bank transactions with affiliates, among other restrictions and limitations.

Restrictions on lending to insiders

Loan terms to insiders are closely regulated and some transactions can be prohibited entirely. Additional requirements for loans to executive officers and directors exist.

Anti-tying rules

The Bank Holding Company Act (BHC Act) prohibits banks from requiring their customers to obtain any product or service, including non-bank products or services, as a condition to the extension of credit. Certain safe harbors exist.

Prohibitions on discrimination

The Equal Credit Opportunity Act (ECOA) applies to all creditors and prohibits a lender from discriminating on the basis of a protected characteristic (race, color, religion, national origin, sex, marital status, age, the receipt of public assistance).

Below are some consumer-specific restrictions on lending.

Consumer lending disclosure obligations

Truth in Lending Act (TILA) and Regulation Z require certain disclosures to be made when providing consumer credit. The ECOA requires notification disclosures to be provided to denied applicants of consumer credit.

Prohibitions on unfair, deceptive, or abusive acts or practices (UDAAPs) in consumer lending

The Dodd-Frank Act prohibits UDAAPs. For generic examples of what may be considered a UDAAP please consider the Consumer Financial Protection Bureau bulletin dated 10 July 2013.

Additional prohibitions on discrimination

The Fair Housing Act prohibits discrimination on the basis of race, color, national origin, religion, sex, familial status, and handicap in all aspects of 'residential real estate related transactions, including but not limited to: (1) making loans to buy, build, repair, or improve a dwelling; (2) purchasing real estate loans; (3) selling, brokering or appraising residential real estate; or (4) selling or renting a dwelling.'

Residential mortgage requirements

Residential mortgage origination, selling/purchasing, and servicing is closely regulated on both a federal and state level. Numerous restrictions, standards, and disclosure requirements specific to residential mortgages exist in this highly regulated space.

Borrowing

While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.

Last modified 24 Jan 2020

Are there any restrictions on lending and borrowing?

Lending

While there are no general restrictions on lending, a lender may need to comply with various codes or regulations if engaging in certain lending practice, particularly if lending to individuals or consumers. The most important to note are as follows:

  • The National Credit Code applies to credit contracts entered into by natural persons or strata corporations, for personal domestic or household purposes or the purposes of residential improvement. The National Credit Code imposes a range of regulatory requirements on the lender that do not apply to loans that fall outside its scope. Those outside its scope generally include loans to companies and loans predominately for business or investment purposes.
  • The Banking Code of Practice (BCOP) of the Australian Banking Association (ABA) came into effect on 1 July 2019. It is effectively a complete rewrite of the previous 2013 Code of Banking Practice. Although the BCOP is voluntary, each ABA member bank with a retail presence in Australia is required to subscribe to the BCOP as a condition of its ABA membership. The BCOP is binding and the BCOP rules form part of the contractual relationship between the bank and its customer. The BCOP applies to specified banking services provided to individual customers, small businesses1 and guarantors and prospective guarantors in respect of a loan to an individual or small business. Affected "banking services" include bank accounts, term deposits, credit and debit cards, home and personal loans, overdrafts, bill facilities, consumer credit insurance and payment and forex services. However, "banking services" expressly excludes shares, bonds and securities, as well as financial products and services provided to wholesale customers. 
  • An Australian credit license must be held by any person engaging in the provision of consumer ‘credit activities’ (including supplying goods on credit). Licensees must comply with a number of general conduct obligations and responsible lending guidelines.
  • The Banking Act 1959 (Cth) and various legislative and prudential requirements must be adhered to for a lender to be a ‘bank’ or to operate as a deposit taking institution. A person must not hold itself out to be a ‘bank’ unless authorized to do so.

1A business is a “small business” if at the time it obtains the banking service all of the following apply:

a) it had an annual turnover of less than AUD10 million in the previous financial year; and

b) it has fewer than 100 full-time equivalent employees; and

c) it has less than AUD3 million total debt to all credit providers including:

i. any undrawn amounts under existing loans;

ii. any loan being applied for; and

iii. the debt of all its related entities that are businesses.

Borrowing

While borrowers are generally not regulated, it is advisable for a borrower to consider whether the National Credit Code or the BCOP apply to his, her or its activities, in which case various protections may be available.

What are common lending structures?

Lending in Australia may be structured in a number of different ways to include a variety of features, depending on the commercial aims of the parties.

A loan may be provided on a bilateral basis (a single lender providing the entire facility), a syndicated basis (multiple lenders each providing a portion of the overall facility) or a club basis (multiple lenders lending bilaterally in parallel).

Syndicated facilities by their nature involve more parties (such as an arranger, an agent and a security trustee which each carry out a specific role for the syndicate banks), are more highly structured and involve more complex documentation. Large financings will typically be done on a syndicated basis, with one of the syndicate taking the lead in coordinating and arranging the financing.

Club facilities involve multiple lenders lending bilaterally to the borrower in parallel to each other on materially similar terms. Club facilities usually do ot involve a facility agent (at least for payment purposes) and they lack syndication terms which dictate funding mechanics, payment distribution, sharing provisions and lender voting regimes. A club facility may be documented in a variety of ways, including by:

  • a deed of common provisions which are adopted wholly or in part by each lender under its facility agreement;
  • individual, but largely identical, bilateral loan agreements; and
  • a single document similar to syndicated loan agreement, but without a payment agent or syndication terms.

Loans will be structured to achieve the borrower’s specific funding objectives. For example, they may be term loans, revolving credit facilities, working capital loans, equity bridge facilities, project facilities and letter of credit facilities, to name a few.

Loan durations

Typically, the Australian banking market  accommodates commercial loan tenors of three to five years. Longer-term debt may be available in limited circumstances.

The duration of a loan may also be determined by its type. For example, typically:

  • a term loan is provided for an agreed period of time but with a short availability period;
  • a revolving credit facility is provided for an agreed period of time with an availability period that extends nearer to the date of its maturity. It may be redrawn if repaid;
  • an overdraft is provided on a short-term basis to solve short-term cash flow issues;
  • a standby or a bridging loan is intended to be used in exceptional circumstances when other forms of finance are unavailable. It often attracts a higher margin; or
  • a cash advance, provided on a short-term basis to cover short-term cash flow issues and often attracting a higher margin.

In Australia, bill facilities are also used sometimes and they operate with bills maturing and ‘rolling over’ at set intervals (usually 30, 60, 90 or 180 days). Historically, loan note facilities have also been made available for stamp duty or income withholding tax purposes.

Loan security

A loan may be either secured, unsecured (including on a ‘negative pledge’ basis) or guaranteed.

Loan commitment

A loan may be:

  • committed, meaning that the lender is obliged to provide the loan if certain limited conditions are fulfilled. Conditions precedent will be set out in the loan agreement; or
  • uncommitted, meaning that the lender has discretion whether or not to provide the loan.

No conditions precedent will be set out in the loan agreement.

Loan repayment

A loan may be repayable:

  • on demand,
  • on an amortizing basis (that is, in instalments over the life of the loan or as may be scheduled); or
  • upon maturity (commonly referred to as a 'bullet loan').

What are the differences between lending to institutional / professional or other borrowers?

Consumer and small business lending is generally heavily regulated, requiring necessary licenses and compliance obligations.

By contrast, lending to institutional or professional borrowers is subject to less regulatory oversight and is less burdensome from a compliance perspective.

Do the laws recognize the principles of agency and trusts?

Yes, both principles are recognized under Australian law. Relationships based on the principles of agency and trust are commonly found in Australian financing transactions.

For example, in a syndicated financing, the syndicate will appoint an agent (usually the arranging bank) to act on behalf of the syndicate banks.

The agent will coordinate activities relating to the loan repayments, correspondence between the borrower and the syndicate banks and other matters. The syndicated loan documentation will typically contain provisions defining the nature of the agent's appointment and the scope of its authority and liabilities.

In a secured syndicated financing, the security will be granted in favor of a security trustee which will hold the security on trust for the benefit of the banks.

Borrowers are also commonly trustees, particularly in the real estate investment sector.

Are there any other notable risks or issues around lending?

Generally

Loan agreements and other finance documents are subject to general statutory, contractual and common law principles.

Australian courts will not enforce a penalty in a loan agreement. Lenders muat therefore be careful when determining the rate of default interest and the amount of any cancellation, prepayment or similar fees.

A lender should be aware that, even if it is rightfully exercising its rights under the loan agreement, the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) prohibits persons from engaging in unconscionable conduct or morally wrong behavior. In determining what constitutes unconscionable conduct, the court will consider the bargaining power of the parties, the parties' respective abilitiesto understand the documents and the lender's disclosure of certain risks.

Unfair contract legislation

The Australian Consumer Law and the ASIC Act regulate unfair contract terms found in standard form contracts entered into or renewed after 12 November 2016 where:

  • it is for the supply of goods or services or the sale or grant of an interest in land;
  • at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and
  • the upfront price payable under the contract is no more than AUD300,000 or AUD1 million if the contract is for more than 12 months.

A standard form contract is a contract that is prepared by one party where the other party has little or no scope to negotiate the terms of the contract. If a court declares a term of a standard form contract to be unfair, the term will be void and the contract will continue to operate unless it is inoperable without the void term. Consumers and Australian Consumer Law regulators are able to claim for damage incurred as a consequence of the unfair contract term.

In the context of financing transactions, the unfair contract legislation will be primarily relevant to home loans and small to medium sized commercial loans documented on the lender's standard form documentation.

Specific types of lending

Acquisition finance

An Australian company may not provide financial assistance to a person to purchase shares in the company itself or its holding company (even if that holding company is incorporated outside of Australia) unless the financial assistance:

  • does not materially prejudice the company, its shareholders or its ability to pay its creditors (the ‘no material prejudice’ exception);
  • has been approved by the company’s shareholders in accordance with the 'whitewash' procedure prescribed by the Corporations Act 2001 (Cth); or
  • falls within a specified exemption. A common example of prohibited financial assistance is the granting of a guarantee or security by a company whose shares are being purchased in support of a loan advanced by a financier to the purchaser to fund the share acquisition.

Companies and their financiers do not generally rely on the ‘no material prejudice’ exception and the specified exemptions are only sometimes relevant. Instead, the common practice in Australia (and the prudent approach) is for the company to obtain shareholder approval of the financial assistance by way of the whitewash procedure. The whitewash procedure in Australia can be more time consuming and complex to implement than equivalent procedures in other jurisdictions.

A breach of the financial assistance prohibition will not affect the validity of the transaction, but may result in civil and criminal sanctions.

The Personal Property Securities Act 2009 (Cth) (PPSA)

The PPSA came into effect on 2012 and it comprehensively overhauled the laws then in force for taking security over personal property in Australia. The PPSA has been modelled on the equivalent Canadian and New Zealand statutes and it bears much resemblance to Article 9 of the US Uniform Commercial Code. 

The PPSA adopts a substance-over-form definition of 'security interest', which captures not only traditional forms of security, such as charges and mortgages, but also quasi-security arrangements, such as turnover trusts and retention of title. The PPSA also deems certain other arrangements to be security interests, such as leasing or bailment interests and the interests in assigned receivables. Each of these types of 'security interests' should be perfected, most commonly by registration on the Personal Property Securities Register, to ensure that it operates effectively upon the grantor’s insolvency or liquidation. It is important to give careful consideration to whether a registrable form of ‘security interest’ under the PPSA arises in the relevant transaction.

Standard form documentation

Most syndicated finance transactions in Australia are documented on the basis of recommended form Australian law documentation published by the Asia Pacific Loan Market Association (APLMA). This documentation has been modelled on the recommended forms produced by the Loan Market Association in London.

Less complex and usually bilateral transactions are generally documented on bank standard form documentation prepared in-house or on bespoke facility documentation prepared by the advising solicitors.

The Banking & Financial Services Law Association (BFSLA) has produced standard templates for legal opinions in financing transactions and these are generally followed in the Australian market.

Are there any other notable risks or issues around borrowing?

There are limited restrictions on borrowing in Australia. However, depending on the nature of the transaction, the following issues may need to be considered:

  • foreign investment approval;
  • superannuation funds general prohibition from borrowing money;
  • financial assistance;
  • loans to directors;
  • corporate benefit rules; and
  • related party transaction provisions applying to public companies; and
  • compliance with the Australian income tax laws (such as thin capitalisation rules which limit the gearing level of inbound and outbound structures, debt/equity rules and transfer pricing rules) and the ATO’s enhanced scrutiny of cross-border related party debts.

Many of these issues are discussed elsewhere in this guide.

 

Are there any restrictions on giving and taking guarantees and security?

Some of the key areas affecting the giving and taking of guarantees and security are as follows.

Corporate benefit

A transaction may be voidable if there is no corporate benefit to the entity. The presence of corporate benefit is a factual matter.

Corporate benefit is a particular issue for guarantees. Each director owes a duty to the company to act for the benefit of the company in its best interests, with due care and diligence, in good faith and for a proper purpose. Each director must also avoid any conflict between his or her personal interests and those of the company. These duties must be observed when it is proposed that a company grants a guarantee of the obligations of another.

In deciding whether to grant a guarantee (or provide third party security), the directors may consider both direct and indirect benefits flowing to the company. For example, in the context of a corporate group, the granting of a guarantee might indirectly benefit the guarantor if it is a requirement for the support of a related company and benefits flow back to the guarantor. Note that corporate benefit must be assessed at the level of the individual company – i.e. it is not sufficient that the guarantee benefits the group as a whole.

A director of a wholly-owned subsidiary may take into account the best interests of its holding company so long as the company's constitution permits him or her to act in the best interests of the holding company and the subsidiary is solvent.

It may be possible to address concerns regarding the presence of corporate benefit by obtaining shareholder approval for the transaction.

A guarantee that does not benefit the company commercially may be voidable. Further, the guarantee could be held to be an unfair preference or uncommercial transaction. The directors could be subject to civil and criminal penalties and personal liability.

 

Insolvency and voidable transactions

If a lender enters into a secured transaction shortly before the company becomes insolvent, unsecured creditors may be able to challenge the security on the basis that the grant of security constituted an unfair preference or an uncommercial transaction. Unfair preferences and uncommercial transactions are both voidable. If the unsecured creditors are successful, the lender will not be able to have recourse to the purportedly secured assets and they will be distributed amongst all creditors, including the unsecured creditors. The rules are technical and the following is a simplified outline.

Unfair preferences arise where one creditor is unfairly preferred over others.

Uncommercial transactions do not involve creditors as such, but aim to recover any disposals of assets at an undervalue.

The transaction must have been entered into while the company is insolvent, or the company must have become insolvent as a consequence of the transaction. It must also have been entered into during the period ending on the 'relation-back day', but on or before the winding up process began. For unfair preferences, the period is six months, and for uncommercial transactions, it is two years. In each case, the period is four years in the case of related parties and 10 years if the transaction was entered into to avoid the rights of creditors. The relevant period is known as the 'hardening period'.

After the end of the hardening period, the transaction is no longer vulnerable to being voided.

Financial assistance

An Australian company may not provide financial assistance to a person to purchase shares in the company itself or its holding company (even if that holding company is incorporated outside of Australia) unless the financial assistance:

  • does not materially prejudice the company, its shareholders or its ability to pay its creditors ('no material prejudice' exception);
  • has been approved by the company’s shareholders in accordance with the 'whitewash' procedure prescribed by the Corporations Act 2001 (Cth); or
  • falls within a specified exemption.

A common example of prohibited financial assistance is the granting of a guarantee or security by a company whose shares are being purchased in support of a loan advanced by a personfinancier to the purchaser to fund the share acquisition.

Companies and their financiers do not generally rely on the ‘no material prejudice’ exception and the specified exemptions are only sometimes relevant. Instead, the common practice in Australia (and the prudent approach) is for the company to obtain shareholder approval of the financial assistance by way of the whitewash procedure. The whitewash procedure in Australia can be more time consuming and complex to implement than equivalent procedures in other jurisdictions.

A breach of the financial assistance prohibition will not affect the validity of the transaction, but may result in civil and criminal sanctions.

Related party transactions

Chapter 2E of the Corporations Act 2001 (Cth) is intended to preserve and maintain the assets or resources of public companies by requiring that, in simple terms, financial benefits passed to related parties that might diminish or adversely affect those assets or resources are disclosed and approved by a general meeting of the public company beforehand.

The provisions are detailed, but essentially a public company (or an entity controlled by a the public company) may only give a financial benefit to a related party of the public company if:

  • the benefit falls within one of the seven categories of exempted financial benefit (e.g. arm's-length terms, pursuant to a court order); or
  •  if the benefit is of any other kind, the public company has obtained the approval of its members to give the benefit or to enter into a contract to give the benefit.

Failure to comply with the related party transactions laws will not affect the validity of the transaction, but it may render any person involved liable for a civil or criminal penalty.

 

National Credit Code

The National Credit Code applies to credit contracts entered into on or after 1 July 2010 where:

  • the lender is in the business of providing credit;
  • a charge is made for providing credit;
  • the debtor is a natural person or strata corporation; and
  • the credit is provided for personal or domestic use or to purchase, renovate or improve residential property for investment purposes or refinance credit previously provided for this purpose.

There are certain confined exemptions (e.g. for low cost short term credit). The Code does not apply to business loans.

Where the National Credit Code applies there are restrictions on the guarantees that a lender may obtain from a customer. For example, a guarantee from an individual must be limited (in terms of the amount the lender can recover) to the amount of the relevant loan plus interest, charges, costs and expenses. There also are various disclosure and other obligations that the lender must comply with. Failure to comply may render the guarantee or security unenforceable.

Banking Code of Practice

The restrictions noted above apply in a similar manner under the 2019 BCOP, the ABA’s voluntary code of practice which is mandatory for retail banks to adopt as a condition of their membership of the ABA and which is enforceable by law. Similar to the National Credit Code, a bank that is a signatory to the BCOP may only accept a guarantee which is limited to (a) a specific amount or category of amounts (such as all amounts owing under a specific loan) plus other amounts (such as interest and recovery costs) or (b) the value of a specified property or other asset under a specified security at the time of recovery.

Foreign lenders

There are technical restrictions on the foreign ownership of Australian assets and companies set out in Australia's foreign investment legislation, namely the Foreign Acquisitions and Takeovers Act 1975 (Cth). Foreign lenders and foreign entities taking the benefit of security over Australian assets should consider the possible application of this legislation, which is administered by FIRB. Notification to FIRB and FIRB approval may be required in some cases before a foreign entity takes or enforces security. Particular issues arise for foreign government investors upon enforcement. 
There is a fairly broad ‘moneylender’ exemption for lenders. In simplified terms, if security over Australian assets is held in the ordinary course of carrying on a business of lending money and solely by way of security for the purposes of a 'moneylending agreement', the moneylender exemption will generally apply. This exemption also applies to the acquisition of an interest in an Australian asset arising by way of enforcement of a security interest held solely for the purposes of a moneylending agreement.

A moneylending agreement is defined as:

  • an agreement entered into in good faith, on ordinary commercial terms and in the ordinary course of carrying on a business (a moneylending business) of lending money or otherwise providing financial accommodation, except an agreement dealing with any matter unrelated to the carrying on of that business; and
  • for a person carrying on a moneylending business, or its subsidiary or holding entity, an agreement to acquire an interest arising from a moneylending agreement as described above.

Where the exemption applies, notification and FIRB approval are not required when taking or enforcing the security.

There are limits on how long the foreign government investors may hold onto an interest upon enforcement. For these investors, the moneylender exemption requires in effect that, if its interest is acquired by way of enforcement of a security, that interest must disposed of, or a genuine sale process commenced, within six months of the acquisition (or 12 months in the case of an authorised deposit-taking institution). If this does not occur, separate FIRB approval is required. The concept of 'foreign government investor' is broadly defined and potentially easily triggered. For example, it could include a trustee of a trust in which a foreign government holds a substantial interest and general partner of a limited partnership in which a foreign government holds (alone or with associates) at least a 20% interest (or 40% or more where there is more than one foreign government).

Failure to obtain FIRB approval, if required, could give rise to penalties, an unwinding of the transaction or an order for the disposal of assets.

Critical infrastructure

If the security is taken over a ‘critical infrastructure asset’, which includes approximately 200 electricity, gas, water and port assets, then a secured creditor may have reporting obligations under the Security of Critical Infrastructure Act 2018 (Cth) if it is in a position to directly or indirectly influence or control the asset.

What are common types of guarantees and security?

Common types of guarantees

Guarantees may take a number of forms, including the following.

guarantees AND INDEMNITIES

Guarantees taken in support of loan facilities typically include both guarantee and indemnity provisions (albeit the document may be described simply as a ‘guarantee’). A guarantee is a promise by the guarantor to ensure that the borrower fulfils its obligations under the facility agreement (primarily to repay the loan) and a promise by the guarantor to fulfil those obligations if the borrower fails to do so. The borrower’s obligations are primary and the guarantor’s obligations are secondary. A guarantee is contingent on the borrower’s primary obligation remaining valid, so that if for any reason the borrower’s obligations are set aside, the guarantee will also fall away. An indemnity is also a promise to be responsible for another’s loss. However, unlike a guarantee, it is a primary obligation given by the indemnifier in favour of the beneficiary. It is not contingent on the borrower’s obligations remaining on foot. Therefore if the borrower’s obligations are set aside for any reason, the indemnifier will remain liable under the indemnity.

This category may include a parent guarantee and indemnity, whereby a parent company or sponsor promises to be accountable for its subsidiary's obligations. A parent guarantee and indemnity is sometimes limited by its terms or operation.

Performance guarantees

A guarantor's promise to be accountable for the performance of an act or contractual obligation of another individual. For example, a completion guarantee ensuring that completion of the project occurs on a specified date. This is distinct from a traditional guarantee only in so far as the guarantee usually is limited to performance obligations (rather than payment obligations) and, with the exception of damages, the guaranteed beneficiary's recourse is limited to demanding performance (rather than payment).

 

Bank guarantees

An unconditional and irrevocable undertaking by a bank in favour of a named beneficiary to make a payment upon receipt of a complying demand from the beneficiary. The bank will then seek reimbursement from its customer under the terms of the indemnity contained in the facility agreement between the bank and the customer.

Performance bonds

An irrevocable undertaking by a financial institution to pay an amount on demand or, in some cases, on the condition that the performance obligations of its customer are not met.

Common tyes of security

Security may be granted over almost all types of assets in Australia, subject to any contractual or statutory restrictions. The most commons forms of security are as follows.

MORTGAGES OVER LAND

State and Territory real property legislation applies. Mortgages of real property must be registered with the land titles office of the State or Territory in which the land is situated. Mortgages of leasehold interest in land must also (in most cases) be registered with the relevant land title office.

Mandatory electronic lodgement of land dealings, including mortgages, is currently being rolled out across Australia.

SECURITY OVER PERSONAL PROPERTY

The following forms of security over personal property are governed by the Personal Property Securities Act 2009 (Cth) (PPSA):

  • a general security agreement, where the collateral is all of a grantor's personal property; and
  • a specific security agreement, where the collateral is specific personal property of a grantor, such shares, book debts, plant or motor vehicles.

 

The PPSA adopts a substance-over-form definition of 'security interest', which captures not only traditional forms of security, such as charges and mortgages, but also quasi-security arrangements, such as turnover trusts and retention of title. The PPSA also deems certain other arrangements to be security interests, such as leasing or bailment interests and the interests in assigned receivables. Each of these types of 'security interests' should be perfected, (most commonly by registration) on the Personal Property Securities Register, to ensure that it operates effectively upon the grantor’s insolvency or liquidation. It is important to give careful consideration to whether a 'registrable form of ‘security interest’ under the PPSA arises in the relevant transaction.

Are there any other notable risks or issues around giving and taking guarantees and security?

Guarantees

 

In most Australian States and Territories, a guarantee must be in writing and be signed by the guarantor.

Parties should be careful not to inadvertently discharge the guarantor from its liabilities under the guarantee when making variations to the underlying loanfacility agreement. A guarantor may be released from its guarantee if the underlying facility agreement is varied, save if the variation is immaterial or incapable of prejudicing the guarantor. This is the case even if the guarantor (a) agrees in the guarantee to variations being made to the underlying facility agreement without its consent and (b) is aware of the variations being made. The guarantor should acknowledge the variations to the loan agreement at the time they are made and affirm that its liabilities under the guarantee remain in full force.

Security

Mortgages of real property

Mortgages of real property must be registered with the land titles office of the State or Territory in which the land is situated. Failure to register may result in the mortgagee losing priority to prior registered interests. Priority between registered interests is generally determined in order of registration. Accordingly, mortgagees should not delay in registering.

SECURITY OVER PERSONAL PROPERTY

Where the PPSA applies, security interests in personal property should be 'perfected'. Security interests may be perfected by registration or, in some circumstances, by control (e.g. for certain financial assets) or possession (e.g. for goods and some intangible rights) of the collateral. Registration on the Personal Property Securities Register is the most common method of perfection.

 

It is not mandatory to perfect a security interest under the PPSA. However, if a security interest is not registered or not registered within an applicable timeframe (and not otherwise perfected), then (a) it may vest in the grantor immediately upon the grantor being wound up or entering into voluntary administration, a deed of company arrangement or bankruptcy or (b) a third party may acquire an interest in the collateral free from the security interest.

Registration is also relevant to the priority of security interests. A security interest that is not registered (or otherwise perfected) will lose priority to a security interest that is perfected. Generally, priority between security interests perfected by registration (that are otherwise equal in priority) is determined by the order of registration. Therefore it is important for secured parties to register as soon as, if not before, the security agreement is executed. Certain types of security interests are given 'super priority'. An example is a supplier's security interest in goods that it has delivered to a customer (the grantor) on a retention of title basis. This is called a 'purchase money security interest' (PMSI) and, if perfected, has priority over non-PMSIs. This applies also to the interests of lessors or bailors. A PMSI must be specifically registered as a PMSI to be effective in this manner.

The registration requirements under the PPSA are very prescriptive. Failure to register correctly orand errors in a registration, (for example, in a grantor's details,) canmay render a registration ineffective.

The broad definition of 'security interest' under the PPSA means that the rules regarding registration and perfection apply to many arrangements that, prior to the PPSA, were not considered security interests. Failure to recognizerecognise the existence of, and in-turnto perfect, security interests can have significant consequences for the transacting parties.

A secured creditor has better rights on enforcement if it has a charge over the whole or substantially the whole of the grantor's property. During an administration period, subject to certain exceptions, the Corporations Act 2001 (Cth) imposes a statutory moratorium that prevents security from being enforced against the company's assets, save with the administrator's written consent or with the court's leave. The main exception to the moratorium is that a secured creditor with a charge over the whole, or substantially the whole, of the company's property may enforce it during the 'decision period' (being 13 business days from the time notice of the administrator's appointment is given to the charge, or from the time the administration starts). It is therefore common practice for a lender to obtain security over all or substantially all of the company's assets so as to avoid the risk of moratorium on enforcement of security during an administration. A featherweight charge also addresses administration risk.

‘Ipso facto’ stays

The recent ‘ipso facto’ reforms in Australia may impact on the ability of a lender to enforce upon certain insolvency events occurring in respect of the borrower. From 1 July 2018, new provisions in the Corporations Act 2001 (Cth) have imposed a stay on the enforcement of ‘ipso facto’ clauses against a company if it becomes subject to certain insolvency procedures, namely a substantial receivership or controllership, a voluntary administration or a scheme of arrangement.

An ‘ipso facto’ clause enables a party to terminate a contract or exercise other rights by virtue of the fact the other party becomes insolvent or subject to an insolvency process. An example in a typical facility agreement would be an event of default triggered by the appointment of a receiver to all of the borrower’s assets. The new stay on the enforcement of ipso facto clauses is intended to give companies the space to recover from insolvency without the threat of major contracts being terminated. A party will not be able to enforce an ipso facto clause if the reason for doing so is because (a) the company has entered into the relevant insolvency procedure (b) the company’s financial procedure during the procedure (c) a reason prescribed by regulations or (d) a reason that, in substance, is contrary to the stay (this being an anti-avoidance measure). The stay also extends to rights that arise automatically without a party taking action (known as ‘self-executing’ rights).

There are a number of exceptions and carve-outs. Most relevantly, it does not apply to (a) syndicated loans or bonds, (b) variations to contracts made prior to 1 July 2018, (c) enforcement by a secured creditor holding security over the whole or substantially the whole of the company’s assets (d) enforcement against guarantors and third party security providers (e) drawstops under a facility agreement, meaning that the lender is not obliged to advance new monies (f) arrangements entered into during the relevant procedure and (g) a right exercised with the consent of the court or the administrator, scheme administrator, liquidator or other relevant officer.

Onno Bakker

Onno Bakker

Partner
DLA Piper Australia
[email protected]
T +61 2 9286 8260
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