As part of the ongoing Capital Markets Union (CMU) policy initiative, ESMA issued a detailed opinion on 11 April 2016 on the topics that should be covered by the European Commission in its proposed consultation on establishing a common EU approach to loan origination by investment funds.

While a number of EU jurisdictions (including Ireland) already permit certain investment funds to originate loans, subject to various conditions, ESMA is of the view that a common approach at EU level could facilitate the development of loan origination by such funds. This positive development is very much in line with one of the key objectives of the CMU initiative, which recognises that alternative sources of credit will be a key driver of the European economy in the coming years.

ESMA has advised the Commission that its consultation (scheduled to take place in Q2 2016) should, in particular, seek information to enable it to appropriately consider the following issues:

• Whether a European framework should require mandatory authorisation of AIFMs of loan-originating funds (thereby excluding sub-threshold AIFMs unless they opt in to the full authorisation regime). This would reflect the current position in Ireland.
• Whether loan-originating funds themselves (as opposed to their AIFMs) should be subject to a specific authorisation regime and, if so, should this be a matter for individual Member States?
• Whether retail investors should be permitted to invest in loan originating-funds in certain circumstances.
• Whether loan-originating funds should be limited to the business of originating loans or whether they should be permitted to undertake other operations.
• Whether AIFMs appointed to loan-originating funds should be subject to any additional systems and controls relating to risk management and/or collateral management.
• Whether any conditions should apply to the redemption facilities offered by loan-originating funds or whether these funds should simply be restricted to closed-ended vehicles.
• Whether there should be any mandatory limits on the ability to leverage a loan-originating fund. Under AIFMD, setting any limits on leverage is primarily a matter for the AIFM.
• Whether any mandatory diversification requirements should apply to loan-originating funds.
• Whether loan-originating funds should be restricted from offering loans to certain categories of borrowers, such as individuals, financial institutions or collective investment schemes.

A number of elements of ESMA’s opinion are already reflected in the regime introduced by the Central Bank of Ireland for loan-originating Qualifying Investors AIFs (QIAIFs) in October 2014 (see our previous article). In practice, a number of potential promoters of such funds have struggled with certain restrictions contained within the Central Bank’s rulebook for such funds, particularly restrictions on acquiring non-loan assets. The leverage restrictions and diversification requirements have also been problematic for some promoters. As such, the prospect that these issues will be re-opened for consideration in the context of the Commission’s consultation exercise is very much to be welcomed.

Contributed by Paul Murray