Decree Law No. 91 of 24 June 2014, converted with amendments into Law No. 116 of 11 August 2014 and generally known as the “Decreto Competitività”, introduced significant innovations for those operating in the lending market, particularly as a result of broadening the number of potential investors.
Indeed, the Decreto Competitività has, for the first time in our legal system, enabled insurance undertakings and Sace to engage in lending to businesses, subject to complying with applicable laws and regulations, allowing them to become relevant investors not only in the purchase of receivables, but also in direct lending.
With particular reference to insurance undertakings and Sace, the Decreto Competitività amended certain provisions of both the Italian Consolidated Banking Act and the Italian Code of Private Insurance, enabling insurance undertakings to engage in any form of lending to businesses other than micro-enterprises or individuals, on the one hand excluding that such activity be classifiable as lending to the general public and, on the other hand, allowing the assets of insurance undertakings arising from such activity to be eligible for covering the technical provisions that such undertakings are required to set aside in order to operate in their core sector.
Lending terms and conditions are set out in the Decreto Competitività and – at a regulatory level– in the IVASS implementing regulation, recently enacted after a public consultation held in the summer period. Indeed, by resolution No. 22 of 21 October 2014, IVASS implemented the Decreto Competitività, amending and supplementing ISVAP Regulation No. 36 of 2011, which contains some guidelines on eligible investments and assets to cover technical provisions under the Italian Code of Private Insurance.
(i) CCR’s compliance
First, insurance undertakings should – either directly or through a bank or a regulated financial intermediary enrolled in the register under Article 106 of Legislative Decree No. 385 of 1 September 1993 – submit periodical reports to the Bank of Italy (the so-called “statistical reports”) and any other information and documentation required, as well as take part in the default reporting and monitoring system - Central Credit Register (CCR) - managed by the Bank of Italy.
(ii) Selection of borrowers and role of banks and regulated financial intermediaries
Second, banks and regulated financial intermediaries should maintain an active role in lending by insurance undertakings. Indeed, according to the Decreto Competitività, the implementing regulations – to be issued by IVASS – should meet the following criteria:
- borrowers should be selected by a bank or a regulated financial intermediary enrolled in the register under Article 106 of Legislative Decree No. 385 of 1 September 1993;
- during the whole term of the loan, the bank or financial intermediary should hold a significant interest in the transaction of at least 5% of the total amount of the loan, which may also be transferred to other banks or financial intermediaries.
Furthermore, the above conditions under a) and b) – may not apply only in the event of IVASS expressly authorising a given insurer to act independently in selecting the borrower.
(iii) Requirements applying to insurance undertakings and lending business plan
Any insurance undertaking wishing to engage in lending should
- be adequately capitalised and have an appropriate internal audit and risk-management system enabling it, in particular, to be fully aware of the lending risks associated with the class of assets concerned;
- set out its investment policy by means of a specific framework resolution adopted by its board, including a direct lending investment plan.
The framework resolution, supplemented as above, together with an application for authorisation, should be submitted to IVASS, who will in turn approve or reject it or ask for amendments thereto by a reasoned order within 90 days, in accordance with a tacit approval mechanism.
Only following approval, transposition of the amendments requested or expiry of the term without a response, the board of the insurance undertaking will be entitled to finally adopt the resolution and start lending.
The lending business plan contained in the framework resolution should set out:
- the terms on which direct lending will determine the investment strategic policy;
- the terms on which the insurance undertaking intends to carry out such activity, i.e. independently or relying on the assistance of a bank or a regulated financial intermediary in the stage of selecting the borrowers. In the latter case, the plan should also clarify the level and quality of such assistance, with a focus on the economic interest held by the bank or financial intermediary in the transaction;
- the management and organisation structure of the insurance undertaking for the purposes of starting and monitoring the activity of lending, and the relevant exposure;
- the criteria for the selection of borrowers and for the granting and management of direct loans as well as the process and periodicity of their review based on the performance of the activity. For undertakings relying on the assistance of a bank or a financial intermediary, the selection criteria should also be formalised in an ad hoc agreement regulating the relationships between the undertaking and the bank or financial intermediary, in addition to setting out the process and periodicity of their review based on the performance of the activity;
- the target loan investment amounts and the concentration limits at the borrower individual and group level.
(iv) IVASS’s powers
IVASS is in charge of on-going monitoring of lending, including in terms of its implementation. The Institute has also the power to impose conditions or quantitative limits on lending as well as to prevent the use of loans to cover technical provisions.
(v) Covering of technical provisions
Without prejudice to the above provisions on lending, it is worth recalling that insurance undertakings authorised to engage in lending will have to comply with the percentage limits imposed by IVASS in terms of the eligibility of loans to cover technical provisions.
Indeed, such loans fall, respectively (from general to specific):
- within class A – Investments;
- within macro-class A2 – Loans, whose assets may be used for covering up to 20% of the technical provisions;
- within class A2.2 – Unsecured direct loans granted to persons other than individuals and micro-enterprises, whose assets may contribute to covering up to 5% of the technical provisions.
Furthermore, within such class, it is not allowed to invest assets to cover technical provisions when, having regard to the insurance undertaking’s share:
- the amount of each loan exceeds 20% of the net equity shown in the last financial statements approved by the borrower;
- the amount of each loan exceeds 1% of the insurance undertaking’s technical provisions.
Any insurance undertaking wishing to act in derogation from the above limits shall so indicate in its application for authorisation to IVASS. IVASS shall – subject to approving the investment plan – assess and possibly uphold such request, in any event up to an overall maximum limit of, respectively, 8% of the technical provisions to be covered and 2% of the insurance undertaking’s technical provisions with respect to the amount of each loan.