On the 10th November 2020, the Malta Financial Services Authority (the “MFSA”) issued a circular informing the industry on the revisions made to the Loan Funds Rules, that shall apply as from the date of the issued circular. The new rules shall also be applicable to new applicants applying for a collective investment fund licence to be established in terms of the Loan Fund Rules.
Rationale behind the revisions
The MFSA’s purpose for this restructuring was to attain a better balance between the need for a sound regulatory framework and to make such regime more practical and accessible to relevant entities. The MFSA noted that small and medium-sized enterprises (“SMEs”) should be enabled to use alternative sources of funding rather than the traditional bank financing. Furthermore, the MFSA noted that rendering loan funds more accessible to the industry would continue to enable financial innovation within the sector. The MFSA remarked that alternative financing is essential for certain businesses to continue to thrive and grow within the economy.
Moreover, the revisions have been also pushed by the need to render the regime for Professional Investor Funds (“PIFs”) (established as loan funds) managed by de minimis Alternative Investment Fund Managers (“AIFMs”), more accessible. The old regime did not differentiate between Alternative Investment Funds managed by full AIFMs and Professional Investor Funds managed by de minimis AIFMs which resulted in such PIFs having to comply with unnecessarily onerous requirements, rendering the regime less accessible to smaller entities.
The synopsis below provides an overview of the revisions made to the Loan Fund Rules framework:
|Fund Structure||The requirement of having all sub-funds necessarily classifying as loan funds within the same umbrella structure has been removed.
|Investment Strategy||The revised framework widens the definition of “investing through loans” to include the activities of factoring and/or forfaiting
|Target Loan Recipients||Loan originating funds shall not be able to originate loans to individuals, financial undertaking (as defined in the revised Loan Fund Rules), Collective investment schemes and The AIFM and related parties, including the fund’s service providers
|Service Providers||For Alternative Investment Funds – the requirements have been removed as they are currently replicating the already existing requirements emanating either from the AIF Rulebook itself or the requirements applicable at the AIFM level. For Professional Investor Funds – the requirements applicable to service providers are removed. The requirements are covered in the PIF Rulebook with the exception to the valuation arrangements which shall remain featuring in the revised Rules.
|Cash Borrowing & Leverage Limits||Borrowing restrictions are being removed. The use of Leverage is allowed up to 200% of the net assets of the Scheme. Short selling and reuse of collateral are not permitted.
|Exposure Limits||Investment restrictions are being removed for the most part, for instance, no fixed diversification requirements or limits to exposures shall apply. Nevertheless, the fund’s manager is expected to ensure a sufficiently diversified credit portfolio.
|Risk Management||The revised Rules have been streamlined to avoid duplication of requirements and also to avoid applying the same onerous Rules applicable for full AIFMs to de minimis AIMs.
|Liquidity Management||The revised rules do not include prescriptive requirements such as the Liquidity Maturity Ladder that where included in the previous Loan Fund Rules. The fund manager must ensure to have well documented liquidity management and policies and procedures and that the investment strategy, liquidity profile and redemption policy, are aligned accordingly.
|Self-Managed Schemes||The initial paid up share capital of PIFs investing through loans shall be compliant with the relevant requirements set out in the PIF Rulebook.|
Steps to be taken by already licensed schemes
The MFSA remarks that already licensed loan funds are expected to undertake an assessment to determine how the revised framework may impact the fund’s operations. In this regard, the MFSA notes that any potential issues arising as a result of the revised Loan Fund Rules requiring action by the licensed scheme, need to be addressed by no later than the 1st November 2021.
Please feel free to contact us should you wish to request further information on the revised Loan Funds Regime.