Irish CB pioneers regulatory debt fund framework t funds

The Central Bank of Ireland is set to lift a ban on private debt fund lending and has, as a by-product, designed Europe’s first regulatory framework specifically for the asset class.

The Central Bank of Ireland has set out new rules which allow alternative investment funds operating in Ireland to lend. Simultaneously, it has designed Europe’s first structured regulatory framework for private debt funds. 

The ‘Consultation on loan originating Qualifying Investor AIF’ published on Monday marks the final step before new rules are introduced at the end of the year, lifting a ban on investment fund lending in Ireland which goes back to the 1990s.

Ireland is recognised worldwide as a leading domicile for the hedge fund industry, hence concerns have been raised about the appropriateness of lending by such funds.

The new rules apply to specialised loan origination funds, Martin Moloney, head of markets policy at the Irish central bank, told Private Debt Investor. “Complex investment strategies combining lending with other investment approaches are not an option for these funds,” he said.

The framework has been created in light of changes to the regulatory environment for banks. It has also been driven by a surge in loan origination by funds in post-crisis Europe, which in some cases have replaced banks in terms of lending to SMEs.

Current CBI proposals aim to mitigate financial stability risks attached to loan origination by investment funds, one of which is the risk posed by cross-border lending.

The AIFMD (Alternative Investment Fund Managers Directive), which came into effect on 22 July, provides a Europe-wide regulatory framework for funds but the CBI has come up with what is believed to be the first regulatory framework in Europe specifically for the activity of lending by such funds. “We think that kind of bespoke regulatory framework for lending by AIFs is prudent,” he said. In the US, the Business Development Company (BDC) regulations are similar while the SEC has its own regulatory framework, he explained.

Under the rules, specialist loan funds which qualify will be closed-ended, will not be able to lend more than a quarter of their assets to one borrower and will have 100 percent leverage limits, whereby liabilities cannot exceed assets. There will also be strict requirements on these funds to keep their investors well-informed on the lending that they do as well as reporting to the CBI.

Final submissions to the consultation are due by close of business on 25 August 2014.