Credit Funds and uncertainty resulting from new Bank of Italy regulation

Romeo Battigaglia comments on the Bank of Italy’s new regulation on collective investment schemes and how this affects AIFs and Credit Funds.

Following a consultation launched in July 2016, the Bank of Italy has issued a new Regulation on Collective Investment Schemes (the "New Regulation"), including provisions on Alternative Investment Funds (AIFs) and specifically on "Credit Funds". Under the New Regulation, as expected on the basis of the primary legislation delegating the Bank of Italy to issue implementing regulation, it is confirmed that an EU based AIF willing to grant credit in Italy (in any event, limitately to non-consumers) will be required to give prior notice to the Bank of Italy. What was not expected is that, in the context of the consultation, the New Regulation has interpreted the concept of "granting credit" as extended also to the purchase of receivables. As a result, EU based AIFs willing to purchase receivables in Italy will need to give prior notice to the Bank of Italy and await completion of the relevant procedure (a “one-off”), similarly to those willing to do direct lending in Italy.

Once again, new provisions which were intended to expand the sources of financing in Italy, in light of the above interpretation, result in additional regulatory burdens for foreign credit funds and create uncertainty for those EU based foreign funds which, on the basis of AIFMD, as also implemented in Italy, have completed transactions involving the purchase of receivables in recent times.

Furthermore, the New Regulation requires that the following conditions are met by an EU based AIF in order to carry on this business in Italy:

(a) the EU AIF (to be structured as a close-ended fund) must be explicitly authorised in its Home Country to purchase receivables and/or conduct direct lending

(b) the EU AIF must be subject in its Home Country to rules on control and spreading of risks, including those on limits as to the use of financial leverage, equivalent to those applicable to Italian AIFs - such equivalence to be assessed on the basis of the relevant AIF’s constitutional documents, provided that the Home Country regulator of the latter confirms its observance (in which respect, see point (iii) below for more details).

As far as the procedure and documentation required for the Bank of Italy to assess the above conditions are concerned, key points to note are the following:

(i) the intention to purchase receivables in Italy and/or conduct direct lending must be notified to the Bank of Italy at least 60 days in advance of the start of the activity in Italy; the Bank of Italy, as a first step, verifies that the information and documentation provided are exhaustive and that nothing else is required; if so, the Bank of Italy gives confirmation to the AIF that no further information or documents are required, and the AIF can then start operating once 60 days have elapsed from such confirmation without the Bank of Italy having rejected the request to proceed,

(ii) a confirmation by the relevant Home Country regulator or, as an alternative, by means of a legal opinion, that the relevant EU AIF is authorised to purchase receivables and/or doing direct lending in its Home Country is required,

(iii) the legal representative of the AIF shall confirm the “equivalence” of the Home Country relevant regulation to Italian corresponding regulation (as per (b) above), supported by a legal opinion; as an alternative, it can be that the relevant Home Country regulator provides this confirmation and “guarantee” (sic!) that the AIF complies with such equivalent regulation as set forth under its constitutional documents,

(iv) the provision of a summary note describing the AIF’s organisational framework, investment policies and functioning, specifying whether investors are requested to sign “side letters” and, if so, in what forms and with which contents is required.

The documentation can be produced in Italian or in English.

Finally, the New Regulation confirms that AIFs (including domestic AIFs) shall comply with the Bank of Italy provisions on transparency, similar to any banking institution of other financial intermediaries providing lending. This will also result in a significant investment in new infrastructure and set of documentation, from on-boarding to execution and on an on-going basis in terms of reporting.

In conclusion, it is recommended that EU based AIFs interested in carrying on the business of purchase of receivables and/or direct lending in Italy provides a notification to the Bank of Italy sooner rather than later, in order to be realistically ready to execute relevant transactions where the opportunity arises and not run the risk of incurring delays depending on the length of the Bank of Italy’s procedure.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.