Refined SMEs: equal monks, equal hoods?

There has been quite a bit of commotion in recent months about the penalty interest for early repayment of residential mortgages. The Netherlands Authority for the Financial Markets (AFM) published an investigation on 20 March into the penalty interest rates charged by mortgage lenders. The conclusion is that the calculation methods are often incorrect and that the results are unfair. Therefore, excessive fines are charged. 

Since 14 July 2016, a new mortgage directive has been included in our legislation. The banks will recalculate the penalty interest charged to consumers after 14 July 2016. These consumers can then get part of their money back.

Consumers who have paid a fine before 14 July 2016 can try to prove their case in court or via the Kifid (Financial Services Complaints Institute). The AFM responds to complaints about the penalty interest charged to consumers. We now know that the penalty interest rates are often set too high, but what about the penalty interest charged for your business loan?

What is a penalty interest?
If you take out a fixed-rate loan, you agree that you will pay the interest rate to the bank for a certain period. If you do not comply with this agreement, the bank will suffer a financial disadvantage. You must then pay a fee for this. This compensation is called a "penalty interest".

The provisions of the penalty interest for the business financing are "hidden" in the fine print of the loan agreement. In a, for many, somewhat cryptic way is described how a penalty interest is calculated.

When a penalty interest?
Interest rates have fallen sharply in recent years. This may be a reason for you to reconsider the loans and rates. It may then be interesting to make additional repayments or to prematurely extend your (fixed-rate) loan and make a new interest rate agreement. This is possible because, for example, you think that the interest rates are favorable at the moment and/or because you want to spread your interest rate risk. 

It is important for every company that interest management is applied in a responsible manner. The question then naturally arises: what is stipulated about this in the loan agreement? In many cases, the bank can charge a penalty interest.

The report of the AFM
The Netherlands Authority for the Financial Markets indicates in its report of 20 March how the penalty interest should be calculated. The essence: banks are not allowed to charge more than the total of their "financial disadvantage". Among other things, it is prescribed which comparative interest the banks may use in the calculation. The comparative interest rate is the rate of a mortgage with a term that is comparable to the remaining fixed-interest period. If this is not available, the highest adjacent interest rate must be used.

In other words: a bank cannot calculate its financial disadvantage on the basis of the remaining term X the interest rate (for example 3 years x 4,5 percent). The bank must apply a correction for the rate it charges for a new mortgage (for example 2 percent) and this difference is then seen as a disadvantage.

In any case, it is a nice report for the consumer. For the entrepreneur, however, this report offers no solace. The protection against unreasonable penalty interest is there for the consumer, but not really for the entrepreneur. What about if you have business financing?

How does the penalty interest work with a business financing?
With a fixed-interest business loan, the bank often offers you the option of repaying a limited percentage per year without penalty. Do you want to repay more or do you want to repay your loan early? Then you usually have to pay a penalty interest. A "comparative interest" is also used in the calculation. In the conditions it is often only stipulated that this is understood to mean the interest that the bank would receive on the interbank market for comparable loans. The bad thing about this is that the interbank rate (read: Euribor) is often considerably lower than the rate of a loan with a term equal to the remaining fixed-interest period.

In other words: by making the penalty interest dependent on a lower comparative interest rate, the banks can now charge much more than the "financial disadvantage" actually is. In addition, the conditions often state that the penalty is at least 1 percent of the amount to be repaid early. In many cases, this minimum of 1 percent also applies to variable-interest loans, despite the fact that there will be little or no financial disadvantage for the bank.

Also reasonableness for the SME?
In my opinion, it should also apply to the corporate financing of SMEs that the bank may not charge more penalty interest than the “financial disadvantage”. Why the reasonableness test for a penalty interest should only be applied to consumers and not to SMEs is incomprehensible. This is mainly because the SME, given its position, is comparable to a consumer and is highly dependent on what the bank imposes when providing financing.

Moreover, there is much to be said for the fact that the bank must also be transparent in these cases and provide a specification of the way in which it has calculated the penalty interest without further ado. You can expect from the duty of care that the bank has that means that it only charges reasonable fines for every customer, including SMEs.

Marianne Adama

Marianne Adema is a lawyer at Adema Advocatuur and Advice. She specializes in financial law, agricultural law and real estate law. Adema assists many agricultural entrepreneurs and has an advisory and litigation practice. She is also a legal advisor on various wind turbine projects.

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