Regulated funds in some countries in Europe, including Ireland, have been permitted to originate loans subject to a variety of conditions. Unfortunately for the asset management community, these conditions vary from country to country and in some cases are contradictory.
Recognising that alternative credit providers will be a key driver of the European economy in the coming years, ESMA, in an opinion issued on 11 April 2016, has encouraged the European Parliament, the European Council and the European Commission to address the issue of loan origination by investment funds head on. This is a helpful development.
ESMA is of the view that a common approach at EU level could facilitate the take-up of loan origination by investment funds, a sentiment we agree with and which would also be in line with one of the key objectives of the EU's Capital Markets Union policy initiative.
In its opinion, ESMA is proposing that the European Commission would seek information on and then potentially address the need for regulation regarding:
- whether managers of loan originating funds should have to be authorised AIFMs which would exclude registered AIFMs from managing loan originating funds (reflecting the current position in Ireland);
- whether loan originating funds themselves should be subject to regulation and, if so, if such regulation should be on a pan-European basis or a matter for each separate member state, subject, in the latter case, to certain mandatory principles;
- what conditions should apply to loan originating funds particularly as regards their redemption provisions (should they have to be closed-end vehicles?) and should there be particular rules regarding liquidity management in such funds;
- should loan originating funds be limited solely to the business of issuing loans or should they be entitled to undertake other operations;
- what types of investor should be permitted to invest in loan originating funds and, in particular, should such funds be open to retail investors in certain circumstances;
- what organisational requirements, including required policies and procedures, should apply to loan originating funds and their managers;
- what, if any, leveraged limits should apply to loan originating funds;
- what other restrictions and limitations should apply to loan originating funds (including whether certain categories of debtors should be excluded, as recommended by ESMA).
In Ireland regulated loan originating funds are permitted but limited as to the business they can conduct to issuing loans and related matters. It is interesting to note in this context that ESMA state that in most other jurisdictions loan originating funds are allowed to pursue other business activities. This is one of the key changes sought by Irish industry participants to the Central Bank's rules for loan originating qualifying investor AIFs and we would hope that the Central Bank would consider such a change as a matter of priority now rather than awaiting the outcome of any EU wide consultation on loan originating funds generally.
Following publication of ESMA's opinion, the European Commission intends to launch a public consultation on the issue of loan origination funds within the context of the Capital Markets Union policy initiative, which we now await.