German regulator opens door for origination funds

The new framework will eliminate uncertainties in the way BaFin applies rules to debt funds.

Germany’s financial regulator BaFin has taken the unprecedented step of endorsing the creation of loan origination funds in Germany on the back of similar initiatives in Europe.

Speaking to PDI, Angelo Lercara, partner at Dechert, called the guidance published on 12 May “progressive”, given the regulator went a step further than expected.

Domestic fund managers had petitioned BaFin to lift rules on the restructuring of loans held in funds. Until now, a banking or credit business licence had been required by debt funds in Germany to do so.

However, after an assessment of European regulation body ESMA’s views and following in the footsteps of similar developments in other jurisdictions, such as in Ireland, Italy and Malta, BaFin has recommended that certain debt funds should be allowed to originate loans in Germany. “It’s unusual that BaFin would say: ‘let’s join others’ with a flexible regime,” Lercara noted.

“[The new rules] should have a major impact on the German debt fund market. It will now be possible for certain funds to even grant loans,” Lercara said.

The decision was driven by a specific need in the German fund industry to address the way in which German-regulated managers specifically can set up loan funds for institutional investors, Lercara said. “You might see some smaller fund providers or credit managers becoming more visible now,” he added.

PDI understands that debt funds domiciled outside of Germany are originating loans in Germany and that until now legislation allowing them to do so had been unclear. “It was not so clear before the note was published and now [origination by debt funds domiciled in other EU member states] must in principle also be allowed. If not then the German regulator would be treating other EU funds differently to German domiciled-funds,” Lercara said.

The legal basis for the framework will require approval by the German parliament. There is no known timeline on this but it is expected to come soon, Lercara added. A few restrictions will be applied though, such as loans are not to be granted to retail clients and risks will need to be properly managed.

The industry is expected to immediately implement the rules however, Lercara said.