Towards a European Legal Framework for Loan-Originating Funds

Over the last few years, the European AIF industry has witnessed a surge of interest in loan-originating funds. Both regulatory and economic aspects have been driving this trend. The tighter regulation and increased capital requirements imposed by Basel III on traditional lending banks has reduced the capacity for banks to issue loans. In particular, this holds true for issuing loans to SMEs. Unlike large corporates, SMEs do not have the possibility of a wide range of financing options, such as bonds and listed debt instruments. Given the dependence of European SMEs on bank financing, this created a massive gap in the financing market. Furthermore, institutional investors have been looking to diversity their assets in the search for yield in a low-interest rate environment. This is where European loan-originating fund managers have successfully been stepping in. The current main problem for loan-originating funds in the EEA is that Member States have implemented CRD IV in different ways that restricts loan-originating fund managers in granting loans to SMEs in various EEA Member States. Some Member States take a rather strict approach and consider the origination of loans as a pure banking activity (the so-called ‘banking monopoly’), whereas others also allow non-banking entities to grant loans in their domestic markets. This causes a fragmented landscape for loan-originating funds in which loan-originating fund managers are, in practice, forced to strategically focus themselves on a few (big) EEA domestic markets. As a response to loan-originating funds gaining traction with the EEA, a number of EEA Member States have opened up their ‘banking monopoly’ to boost lending to SMEs by loan-originating fund managers. Despite having the same objective, the regimes on the national level are not necessarily consistent and the current ‘goldplating’ of national AIFMD product laws makes the pan-EU origination of loans for loan-originating fund managers challenging. Furthermore, the regulatory strings attached to the ELTIFR, EuVECAR and EuSEFR have so far offered little help in remedying this fragmented landscape. In an attempt to investigate the current landscape, ESMA conducted research into national loan- originating fund product regimes and issued an opinion related to that. Although the mood is reasonably optimistic, no harmonized EU proposal is yet in place. This contribution seeks to contribute by developing pan-EU standards to facilitate the growth of lending to SMEs and soliciting capital from EEA investors by pan-European loan-originating funds. To that end, section 2 discusses the differences between 'loan funds', loan-originating funds' and 'loan-participating funds'. Section 3 focuses on the EU banking law restrictions, as implemented by Member States under their CRD IV national implementations, for loan-originating funds and section 4 on the differences between loan-originating funds versus banks in terms of investor versus deposit protection and systemic risk. Section 5 analyses the current fragmented European loan-originating fund framework. Section 6 proposes a coherent level-playing field European legal framework for loan-originating funds to create a viable EU market for such funds and section 7 concludes.