ACC asks policymakers to focus on ‘quirks’ in European regulation

Cleaning up existing regulatory differences around Europe should be prioritised over sweeping changes, according to a new paper.

European policymakers should focus on removing barriers to the development of alternative credit rather than creating new regulations, according to the Alternative Credit Council.

A paper published by the ACC and law firm Allen & Overy states that European private debt funds are already subject to some of the most stringent regulation in the world and that policy efforts would be best focused on opening up markets for alternative lenders and making it easier to invest across borders.

“The Alternative Investment Fund Managers Directive (AIFMD) already imposes limits on leverage, liquidity and risk management obligations and provides protection for investors,” said Jiri Krol, deputy CEO of the ACC. “We are already a highly regulated asset class.”

The white paper argues that the private debt investor community is largely made up of sophisticated institutional investors who are fully aware of the risks they are taking with their capital. Furthermore, it argues the industry is fundamentally different from banking and should not be considered in the same way.

“There is an improving attitude towards alternative credit among policymakers,” Krol said. “But there is still little appreciation of distinctions between different parts of the market. We still need to do more to educate people about the industry.”

The ACC said further Europe-wide regulation would not be appropriate at present, but does highlight several jurisdictions which currently have barriers that are preventing the development of alternative credit.

For example, it states that France should revise its regulations to enable EU-based non-French AIFs to directly lend to borrowers without the need to use a French fronting bank. It also calls for France to tighten up its bankruptcy rules. Furthermore, it calls for rules to be revised in Germany, Ireland and Italy to bring them into line with other jurisdictions in Europe and clarify grey areas.

Krol said it was important to raise these issues ahead of European Union elections, due in May, and the UK’s departure from the EU at the end of March.

“We could see a relaunch of the Capital Markets Union in the next Parliament,” he explained. “Policymakers need to see what the highest value add will be and take a bottom-up approach to addressing quirks in certain jurisdictions.”

He added that private debt represented a significant portion of capital that could become available to help businesses grow if it could be more effectively deployed throughout Europe.

Krol also called for different approaches to be taken where funds are appealing to retail investors versus institutions. Growing interest in private debt in the retail market, which still remains a small proportion of the total interest, should be examined separately, since a “one-size-fits-all” approach would be detrimental to the development of both retail and institutional private debt opportunities.