On 24 June 2014, Decree 91/2014 (known as the Competitiveness Decree) was enacted.
The decree—which aims to promote the growth of Italian companies by facilitating access to new sources of financing— introduces a new category of asset to cover the technical reserves of life and non-life insurers, which can now also include loan facilities offered to entities other than individualsand micro-companies.
The measure will become effective only once IVASS (the Italian insurance supervisory authority) has issued specific rules outlining the conditions and limits on this type of investment.
On 3 September 2014 the public consultation on the draft measure closed.This measure will amend IVASS Regulation 36/2011 in the area of technical reserves.
The decree introduces thepossibility that undertakings for collective investment (UCIs), including investment funds, may provide financing out of their assets. In particular, this new rule derives from the amendment of the notion of undertakings for collective investment set out by the Legislative Decree 58/1998, according to which the list of assets eligible for investment by such entities has been extended and now includes, amongst other things, receivables arising from financing granted out of their assets.
These provisions depart from the general principle of Italian law that lending on a professional basis to the public is reserved to authorized banks and financial intermediaries.
What are the changes?
- Financing activity by insurers—main conditions
The following conditions will apply:
- Borrowers must be identified by a bank or financial intermediary duly entered in the register provided for in Article 106 of Decree- Law 385/1993. If borrowers are identified directlyby the insurer without a bank’s involvement, prior IVASS authorization of the investment will be required.
- The bank or financial intermediary must have a significant economic interest in the transaction up to the moment that it is completed.
- The insurance company’s system of internal controls and risk management must be such that the borrower has a full understanding of the risks—especially credit risks—connected with this category of asset, although this requirement of understanding does not include a true assumption of the credit risk.
- The insurance company must have an adequate level of capitalization.
- Other proposed amendments to IVASS Regulation 36
The proposed amendments to IVASS Regulation 36 are primarily designed to increase insurers’ opportunities to invest and to diversify their investments, with a view to facilitating access to financing.
In addition to the rules governing financing activity by insurers, the most noteworthy new provisions are as follows:
- Investments in equity securities not traded on regulated markets now include securities issued by limited liability companies whose financial statements are subject to certification.The requirement that certification be held for the past three years has been removed.The same provision on the certification of financial statements has been extended to corporate debt securities not traded on regulated markets.
- With reference to alternative investments, the limit of 5 per cent of the technical provisions relating to the overall assets belonging to Classes A5.2(a) and A5.2(b) has been removed, while it has been confirmed that the general limit of 10 per cent applies to the entire general class.
- lVASS may allow companies to invest in assets other than those provided for in Regulation 36 and in excess of the quantitative limits established in this regulation. Following a company request (to be supported on reasonable grounds), authorization will be granted for one or more investments, provided that:
- the company demonstrates its ability to assess and manage risk;
- there is consistency between assets and liabilities; and
- the company complies with the solvency requirements, even in the medium to long term (also taking into account the absorption of regulatory capital that these investments will require under the new EU Solvency II regime).
- Financing activity by undertakings for collective investment
As well as provisions concerning financing activity by insurers, the new provisions are aimed at opening the Italian lending market to additional qualifying lenders (in addition to banks and other authorized entities), in order to increase the sources of financing available for Italian companies.
It should be noted that the amendments introduced to the Legislative Decree 58/1998 seem to allow such lending activity also by non-Italian undertakings for collective investments, irrespective of any passport/authorization to market their units/shares in Italy.
However, the new rules do not specify the circumstances in which the UCIs are entitled to grant financing. For example, it is not specified whether banks and financial intermediaries must be involved in identifying the borrowers or whether they must keep an interest in the transaction. Further, it is not clarified whether the activity of granting financing will be restricted to certain categories of undertakings for collective investments (for example, alternative investment funds) or will be generally applicable. It seems that the lending activity—by way of investing in receivables, including those arising from financing granted by the same fund—would be limited to closed ended funds only (that is, alternative investment funds, which include, inter alia, real estate funds, private equity funds, etc.), pursuant to the new ministerial decree under public consultation.
Despite the need for further clarity, the decree nonetheless introduces a significant change in the activities of investment funds. Currently, investment funds are entitled to grant financing strictly instrumental to their investment transactions only (that is, shareholder loans, bridge loans, etc.); moreover, the activity of purchasing and selling receivables and credit is included in the lending activity and is therefore reserved to banks and financial intermediaries.As a consequence of the decree, the investment policy of an Italian UCI may focus on restructuring, distressed assets and loans, including real estate loans, commercial receivables and so on; moreover, foreign investment funds, with a particular focus on such asset classes, will be able to access the Italian market without breaching the restrictions on lending activity in Italy, subject to any possible requirements to be defined by the Italian regulatory authorities.