On 2 April, 2014 the Malta Financial Services Authority (MFSA) issued a new set of Investment Services Rules (the Lending Rulebook) applicable to collective investment schemes ‘investing through loans’ (Lending Funds).
The Lending Rulebook defines ‘investing through loans’ as covering both:
- direct origination of loans by the fund; and
- acquiring portfolios of loans or a direct interest in loans that result in a direct legal relationship between the fund as lender on the one hand and the borrower on the other.
Taking inspiration from FSB recommendations in relation to shadow banking, MFSA Banking Rules as well as AIFMD, the Lending Rulebook provides Lending Fund promoters and managers with a detailed (if somewhat restrictive) regulatory framework within which to establish Lending Funds in Malta.
Click here for a copy of the MFSA’s Lending Rulebook.
The highlights of the Lending Rulebook are:
Restricted to Professional Clients – Lending Funds may only be made available to investors that qualify as professional clients under MiFID or who elect to be treated as professional clients and commit to invest at least €100,000.
Closed Ended – Lending Funds may only be structured as closed-ended funds with a fixed duration. Although redemptions are expected to only take place upon expiry of the fixed duration of the fund, the Lending Rulebook allows the Lending Fund to exceptionally permit redemptions on an annual basis out where the Auditors confirm that the fund has excess liquidity.
Lending Restrictions – Lending Funds may only issue loans or acquire portfolios of loans granted to unlisted companies and SMEs. Lending Funds are (a) prohibited from issuing loans or acquiring portfolios of loans granted to financial undertakings (banks, MiFID firms, insurers, financial holding companies or mixed-activity holding companies), households or individuals, and (b) allowing the recipient of a loan to transfer it to a third party.
Investment Restrictions – Lending Funds are subject to detailed investment restrictions including: (a) a prohibition on short-selling, (b) up to 30% of its assets in liquid securities, (c) not more than 10% of its assets exposed to a single undertaking, (d) not more than 10% of its assets in other loan funds (subject to an aggregate limit of 20% in units of such funds), (e) cannot acquire more than 25% of the units of a single loan fund, (f) only short-term borrowing is permitted up to 30% of the Loan Fund’s assets, (g) leverage and re-use of collateral is not permitted and (h) cross sub-fund investment is permitted subject to 25% cap across all sub-funds of the same umbrella (for other types of funds this is 50% in any one sub-fund without a cap on the aggregate).
AIFMD-like rules – The MFSA’s Lending Rulebook subjects Lending Funds (or the AIFM) to rules akin to those under AIFMD even if managed by a de minimis AIFM or a non-EEA AIFM such as a single custodian, valuation, liquidity and risk management as well as higher own funds for self-managed schemes (€300,000).
Policies on Large Exposures and Credit Risk – The MFSA’s Lending Rulebook requires Lending Funds (or the AIFM) to put in place policies on credit risk, credit provisioning and large exposures in each case clearly inspired by the MFSA’s Banking Rules.
The MFSA has indicated that it will continue to monitor regulatory developments in the Lending Fund space and does not exclude revising the Lending Rulebook in the short to medium term.