Foreword
-
Jiri Krol
Deputy CEO, Global Head of Government Affairs, AIMA & Alternative Credit Council
-
Nick Williams
Partner, London, Asset Management, Allen & Overy
Executive Summary
Alternative Credit Council2 (ACC) members are an important source of funding for the European economy. They provide a wide range of finance to SMEs, mid-market businesses, large corporates, commercial and residential real estate developments, infrastructure developments, as well the trade and receivables business. Our members are asset managers and therefore this type of finance is typically referred to as non-bank lending.
The development of alternative sources of finance within the European Union (EU) is an important component of the European Commission’s Capital Markets Union (CMU) initiative. The ACC supports policymakers’ efforts to encourage non-bank lenders as a means of diversifying the finance available to European borrowers. While we are pleased with the recognition that the alternative credit sector is now receiving, we are keen to ensure that any new regulatory initiatives continue to support the sustainable development of the sector.
We believe that policymakers’ approach towards the non-bank lending sector should be based on the following premises:
1. Lending from the capital markets supports financial stability
2. Lending is not banking
3. The role played by existing regulation should be recognised
4. Existing barriers to non-bank lending in individual EU Member States should be addressed
1. Lending from the capital markets supports financial stability
Alternative sources of finance promote financial stability by increasing market liquidity and improving the allocation of risk among investors. The development of non-bank lending also diversifies the sources of finance available to businesses, providing healthy competition to the banking sector and reducing the impact of economic shocks during times when banks are unable or unwilling to lend. This supports a resilient economy and better outcomes for customers and borrowers. Any consideration of regulatory measures should recognise the role nonbank lenders can, and do, play in supporting financial stability and financing the real economy.
2. Lending is not banking
The provision of credit by non-bank lenders to borrowers relies on capital from investors which is at risk rather than customer deposits. This creates a tight alignment of interests as investors in non-bank lenders ultimately bear the risk of their decisions. Asset managers undertaking lending activity also have a fiduciary duty to act in the best interests of their investors. Any attempt to superimpose banklike regulatory approaches on non-bank lenders will erode the uniqueness of the sector and limit the benefits that accrue from a diverse financial system.
3. The role played by existing regulation should be recognised
Non-bank lenders in Europe are already subject to regulatory oversight – including, authorisation and ongoing supervision – under the existing regulatory framework (for example, the Alternative Investment Fund Managers Directive (‘AIFMD’)). This ensures that non-bank lenders:
• are authorised and supervised by national competent authorities (‘NCAs’);
• match the liquidity arrangements of their funds with the liquidity profile of their lending activity;
• undertake rigorous borrower due diligence and credit underwriting procedures on any loans they originate;
• implement risk management systems, including stress testing, to identify, monitor and manage risk arising from their lending activity;
• are transparent in their use of leverage to their investors and NCAs; and
• provide detailed reporting to investors and NCAs.
The existing regulatory framework therefore provides NCAs with the necessary tools to supervise the nonbank lending sector. Further regulatory measures
for non-bank lenders should only be introduced in instances where it has been demonstrated that the risk management processes and regulatory oversight
tools established under the AIFMD and other existing regulations are demonstrably insufficient to manage any risks potentially arising from non-bank lender’s
activity.
4. Existing barriers to non-bank lending in individual EU Member States should be addressed
Although we recognise the efforts of the European Commission (Commission) and Member States to encourage alternative sources of finance, there are still several areas where policy changes are required to support further development of the non-bank lending market in Europe. This should be primarily tackled by addressing the different barriers in each Member State rather than through harmonising legislative measures at EU level. This would be both practical, as different issues arise in different Member States, and consistent with the principle of subsidiarity.
Such diverse national rules introduced by Member States (e.g., requirements for local fund presence, prescribed exposure limits, maturity periods) unnecessarily limit the ability of non-bank lenders to scale their business. Additionally, they prevent the cross-border flow of capital within the EU, limit the ability of non-bank lenders to diversify their investment risks, and reduce the potential investor base for non-bank lenders. Removing these barriers would support the development of the market and increase the flow of credit to businesses in Europe. Further detail on these barriers is provided in chapter three of this paper.
2 The Alternative Credit Council (ACC) is a global body that represents asset management firms in the private credit and direct lending space. The ACC’s core objectives are to provide direction on policy and regulatory matters, support wider advocacy and educational efforts and generate industry research with the view to strengthening the sector’s sustainability and wider economic and financial benefits.