2014 was a busy year in the Irish financial services industry and particularly so for us.
Areas that were particularly active in 2014 included the use of investment funds in property portfolio acquisition transactions, the introduction of a new type of loan originating fund by the Central Bank of Ireland as well as the establishment and listing of another Irish REIT.
The various developments in 2014 show to a certain extent, how the landscape for traditional banking is changing in Ireland with areas previously considered to be banking business being taken up by relatively new entrants to the market.
However, there are changes expected in 2015 and some of the recent entrants to the Irish market may now need to be authorised as Credit Servicing Firms.
Establishing and using investment funds to hold and acquire property was a busy area in 2014. The most common type of vehicle used in our experience was the Qualifying Investor Alternative Investment Fund (“QIAIF”).
A QIAIF is an investment fund regulated by the Central Bank of Ireland (the “Central Bank”) aimed at sophisticated investors with a minimum subscription amount of €100,000. A QIAIF is flexible both in terms of its own structure, it can be established as an investment company, a unit trust or a common contractual fund, and in terms of what it may acquire and hold in its investment pool.
Also, a big attraction for overseas investors is that there are no witholding taxes on income distributions or redemption payments to non-Irish resident investors.
Loan Originating QIAIFs
Traditional investing in equities and holding real estates are not the only things QIAIFs can do and the Central Bank, in the last quarter of 2014, introduced a new concept of loan originating funds or funds that can lend money, structured as QIAIFs.
This regime is the first dedicated regime in Europe for loan originating funds and while it is an innovative development, there are strict requirements around the use of such QIAIFs. Loan Originating QIAIFs are strictly limited to:
- issuing loans;
- participating in loans, including investing in loans in the secondary market; and
- engaging in activities directly linked to lending, such as handling assets which are realised security.
The Loan Originating QIAIF must have policies and procedures dealing with risk appetite; credit monitoring, collateral management, forbearance etc. and must also maintain a comprehensive stress testing programme. These QIAIFs must also be closed-ended and can only engage in corporate borrowing with unrelated entities. REITS
Another big news item in 2014, carrying over from 2013, was Real Estate Investment Trusts (“REITs”) and in 2014 we were involved in the establishment and listing of a new REIT.
Since the introduction of the Finance Act 2013, which established the Irish REIT regime, there have been three REITs. REITs are tax neutral meaning they are exempt from tax at corporate level and also allow investors to gain exposure to property they might otherwise not have access to.
Credit Servicing Regulation
The fact that investment funds can now lend brings us to the question as to whether it is a level playing field when it comes to lending Ireland?
If you are a regulated credit institution you have to comply with the various Central Bank codes, fitness and probity requirements and you also have to keep a keen eye on your balance sheet in terms of non-performing loans and capital adequacy. Whereas the past few years have seen new unregulated entrants into the Irish market buying large loan books.
This position is set to change however, with the publication of the Consumer Protection (Regulation of Credit Servicing Firms) Bill, 2015 (the “Bill”). The Bill introduces a new licencing category called “Credit Servicing Firms” who will require authorisation from the Central Bank to service loan books involving “relevant borrowers”, being both individuals and Small and Medium Sized enterprises (“SMEs”). If you own a loan book and service the loans yourself, or you appoint an entity to service the loan book on your behalf, you or the servicer will need to be regulated as a Credit Servicing Firm to service the book.
Another consequence of the Bill is that if an entity provides credit to an SME in Ireland, that entity (if not already authorised to offer credit in Ireland) will now need to seek an authorisation from the Central Bank or appoint an entity with an appropriate licence to service the loan to the SME and as a consequence, it means that the provision of credit to SMEs in Ireland will be regulated for the first time.
The Bill is a substantial regulatory development and the Minister for Finance has said that the Bill is expected to pass through the Houses of the Oireachtas in the early part of 2015. However, it is hoped that there will be some amendments made to the Bill before it is enacted, particularly as regards the regulation of lending to SMEs.