On 25 November 2021, the European Commission published a proposal for a directive which aims to, among others, establish at European level the possibility of alternative investment funds (AIF) to originate loans.
Even though the majority of Member States allowed AIFs to originate loans (as per a 2016 assessment of the European Securities and Markets Authority (ESMA), the European Commission deemed that different national regulatory standards for loan originating AIFs undermine fair competition conditions for AIFs.
On the other hand, Romania is one of the few Member States responding to ESMA’s 2016 questionnaire that it does not allow AIFs to originate loans. Romanian legislation takes a very restrictive view on the lending business which is reserved exclusively to credit institutions, non-bank financial institutions (IFN), financial institutions and payment services providers granting loans in connection with payment services. In any other case, professional lending is prohibited and is sanctioned as a criminal offence (usury).
The European Commission’s proposal is aimed at managers of AIF (AIFM) originating loans and who will need to comply with the following additional key requirements:
- AIFM must implement and annually review effective policies, procedures and processes for the granting of loans and loan portfolio monitoring;
- subject to specific conditions, loans originated to any single borrower by the AIF must not exceed 20 % of the AIF’s capital, if the borrower is a financial undertaking, an AIF, or a UCITS;
- AIF must not lend to its AIFM or its AIFM’s staff, its depositary or its delegate(s);
- AIFs must retain 5% of the notional value of the loans they have originated and sold off on the secondary market, provided that the loans have not been purchased on the secondary market;
- AIFs must adopt a closed-ended structure if they engage in loan origination to a significant extent (exceeding 60% of the AIFs’ net asset value); and
- AIFM will have certain reporting obligations concerning the loan portfolio of its managed AIFs.
For Romania, the European proposals are welcome as this would open the lending market to entities which can raise capital from investors unlike IFNs which are prohibited from undertaking similar capital raising activities.
When the changes proposed by the European Commission come into force, it will be necessary to align the Romanian lending regime to European requirements. The main difficulties raised by the Romanian legal environment focus around:
1. Legal provisions on professional lending
The European Commission’s proposal provides for several obligations aimed at ensuring the security of the lending operation such as implementing various lending policies at the AIF level. The European Commission does not delve into details on the contents of such policies.
However, Romanian law imposes extensive obligations on loan classification, provisioning, counterparty risk analysis in connection with the lending activities of financial entities (other than credit institutions who must comply with specific European requirements). Moreover, IFN exceeding certain lending thresholds must comply with additional requirements on exposure, risk management and governance.
To the extent the European Commission’s proposal is transposed as such under Romanian law, financial entities authorised to grant loans under the national regime, particularly IFN, would be exposed to a significant competitive disadvantage to AIFs originating loans whose lending activity would be regulated at a generic level.
Conversely, if national legislation imposed the same lending regulatory conditions on AIFs originating loans, the local regulatory regime would become much stricter than the European framework. The predictable outcome would be that AIFM would be further discouraged from seeking authorisation in Romania, particularly given that this field has had a minimal development at national level. Not only does Romania law offer limited support and solutions to AIFMs, unlike Member States that act as fund hubs traditionally, but it would also create a more uneven playing field in terms of the lending business for AIFMs authorised in Romania by reference to those authorised in other Member States.
A solution could be to align local lending regulatory requirements to European conditions and to adjust prudential/authorisation requirements applicable to IFNs (which are more relaxed than those applicable to AIF/AIFM) in order to strike a balance between authorisation requirements and lending requirements.
2. Supervisory authority
In Romania, the National Bank of Romania (NBR) is the supervisory authority of the lending business being responsible for the authorisation and supervision of, among others, Romanian credit institutions and IFN.
At the same time, the Financial Supervisory Authority (FSA) is the supervisory authority in relation to Romanian AIFM/AIF.
The European Commission’s proposal does not tackle the topic of the applicable supervisory authority in case of loan originating AIFs. From this point of view, an identical transposition of the European legislation at national level would mean the FSA could be supervising the lending business of an AIF.
Such an approach could lead to inconsistent interpretations and practices as regards lending with negative effects both in relation to borrowers and to the market. Courts could be faced with cases in which they would have to offer contradictory solutions to identical scenarios just because the lending entity is different.
In this case, the solution could be to designate the NBR are supervisory authority in relation to the lending activities of the AIF while keeping the AIFM/AIF authorisation regime within the responsibility of the FSA. Alternatively, an interinstitutional cooperation mechanism could pe put in place to ensure a uniform application of lending legislation.
Of course, the proposal may generate other hot topics as well such as:
- if AIFMs authorised in other Member States could rely on the European passport with respect to loan originating AIFs given that the passport refers to marketing AIF units and not to the AIFs business. It follows that the AIF would be granting loans cross-border without having to comply with restrictive lending conditions. Nevertheless, since the lending activity of the AIF is expressly permitted at European level, Romanian law could not prohibit it in principle;
- if AIFMs registered with the FSA under the “de minimis” regime could manage AIFs originating loans. Pursuant to the current legislation in force, such a possibility is debatable but an express provision in this sense would be beneficial. This would encourage the development of the lending field for local businesspeople who often wish to incorporate a lending entity by relying on capital raising from investors but are not willing to undergo the tough authorisation process. Also, subject to further clarifications to the lending legislation, the existence of a new type of lending entity would enhance competition to the benefit of unbankable borrowers (e.g., SME).
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