Much Ado About Nothing: The European ‘High-Level Principles on Feedback Given by Banks on Declined SME Credit Applications’

On 6^th June, five European banking federations signed, with the blessing of three European associations representing the interests of SMEs and businesses, a four-page document entitled ‘High-level principles on feedback given by banks on declined SME credit applications’ (the ‘Agreement’). As the title suggests, the document evidences agreement among the banking federations on a series of ‘high level principles’ on bank feedback. The ultimate beneficiaries of the Agreement are meant to be SME customers whose credit application is turned down by their bank and who might be uncertain about the reasons behind the bank’s decision. Agreement on the principles was announced by the European Commission’s Vice President Dombrovskis who declared that ‘[t]hanks to today’s agreement, SMEs will receive clear feedback on the reasons why their request for financing has been rejected, which will help them to better understand how to actually access the financing they need’.

To be clear, the Agreement is not a Commission document. However, the underlying impetus for the Agreement is the Commission’s Capital Markets Union (CMU) project. The high-level principles are part of the initiatives which make up the Commission’s CMU action plan, especially the Commission initiatives on improving information barriers in the SME funding market. I have written elsewhere about the issue of information barriers in the SME funding market (see my blogpost and my paper). The aim of this post is simply to consider whether the high-level principles are likely to contribute to improving SMEs’ funding prospects.

The high-level principles are subdivided into four categories: prior information; format; content; and timeline. For the most part, the principles are either statements of common sense or, if they add something more meaningful, they tend to be subject to qualifications or reservations. On the common sense side of things, the first principle states that banks are meant to let their SME customers know ‘what is expected from them to fulfil a complete and proper credit application’. This principle offers one useful (but again common sense) clarification: explanations about the information/documentation that is required must be in understandable language. The second principle tells us that banks or SMEs can ask for additional information to improve the application process and to provide feedback. The third principle – on feedback – states that SME customers should be informed, presumably at the time where they apply for credit, about the ‘opportunity’ to get feedback on a declined credit application. It then adds that customers can ‘upon request’ be informed about the ‘procedure’ to request feedback and about the ‘communication channels’ through which feedback is available ‘if it differs from the usual one(s)’. This is a somewhat awkward provision. It seems natural that the act of informing about the possibility of feedback extends to information about the way in which this feedback can be received, especially (and not only) if the channels of information differ from the standard channels.

The next principle – under the heading ‘format’ – states that banks shall provide feedback ‘in an appropriate manner’ to SMEs whose applications has been declined, but again only if feedback is requested. The fifth principle adds that banks can use ‘whichever communication channel is considered most appropriate to provide the feedback’, which presumably means that banks can choose between an oral or written communication. Principle sixth appears to merely rephrase what has already been said. It states that banks shall ‘upon request’ explain their decisions to decline a credit application. Principle seven is another statement of common sense. It states that the feedback is meant to include explanations ‘on reasons for rejection in clear language’. On the same theme, principle eight states that feedback could also extend ‘where relevant and if requested’ to additional information that could help an SME to ‘improve’ its application. Principle nine adds that an SME should be able to have a ‘dialogue’ with a relationship manager or a contact person in the bank. Finally, principle ten states that banks should respond to a feedback request ‘in a timely manner’, but response times will depend on the ‘complexity of the application’.

The principles are preceded by a section entitled ‘Guidelines’ and are followed by a section on ‘Implementation’. As far as the guidelines are concerned, they are essentially qualifications on the purpose and applicability of the principles. Thus, we are told that the principles are meant to respect national initiatives, although it is not clear what is meant by that (on bank feedback or more broadly on SME support?). We are also told that the high-level principles are mainly supposed to improve matters in regions where no national arrangements are yet in place. The section on implementation underscores that the agreement is a ‘voluntary European banking initiative’ and that it will be implemented with the help of national banking associations. A welcome stipulation is that the initiative will be subject to a stock taking exercise after two years.

It is fair to say that concision and clarity are not among the strong points of the Agreement. It is also striking that the need for an SME to make a ‘request’ is a leitmotif throughout the document. There is no detail on how a request must be made, but it is likely to complicate the feedback process and leave the door open for any request to be stifled through unnecessarily winding or lengthy procedures. To be sure, the point about offering feedback on rejected credit applications is important. However, crucially, the Agreement fails to point out that banks already have legally binding duties in this respect. Thus, it makes no mention of the Capital Requirements Regulation (CRR) which includes a ‘feedback’ provision on credit decisions by banks. Specifically, Art 431(4) CRR requires banks to offer SME customers feedback on their creditworthiness when providing that banks should, ‘if requested, explain their rating decisions to SMEs and other corporate applicants for loans […]’. In practice, it appears that the implementation of Art 431(4) CRR (former Art 145(4) of Directive 2006/48/EC) has often not been very successful. It would have made sense to at least remind national banking associations of existing and legally binding feedback obligations, as part of the high-level principles. The European rulebook is extensive and it is conceivable that a poor application record at national level is at least partly due to a lack of awareness of the applicable provisions ‘on the ground’. In short, the signing parties could have tried harder. A bit more ambition with greater clarity (including with respect to legal duties) and fewer reservations and qualifications would have made for a more credible agreement. A more credible agreement would, for example, have invited banks to be more pro-active in their dealings with SME customers, by offering SMEs information about declined credit applications without the need for a prior request. The feedback initiative offered an opportunity to show some boldness through self-regulation. As adopted, this is a half-hearted attempt to make progress on the issue of bank feedback.

Pierre Schammo is a Reader in Law at Durham University, School of Law.