Is it the end of the beginning for credit funds in Italy?

Law Decree n. 18/2016 (containing “Urgent measures regarding mutual banks, guarantees on securitization of Italian banks non performing loans, tax regime applicable to bankruptcy procedures and collective investment schemes”) includes a new set of provisions on credit funds. The Law Decree entered into force on 16 February 2016.

This article focuses on the above mentioned new provisions on credit funds, which, in the alleged intention of the Italian Government, should promote the launch of credit funds in Italy.

Unfortunately though, notwithstanding the intention, these new provisions result in additional regulatory burdens for foreign credit funds to the extent that, at a first glance, they may well have the opposite effect, ultimately jeopardising the ability of foreign Alternative Investment Funds (AIFs) to provide direct lending to Italian clients.

Going into more detail, the provisions which present the risk of ending this promising and long awaited market before it has begun are those setting forth the following conditions to be met by a foreign AIF in order to continue business in Italy:

• The EU AIF (to be structured as a close-ended fund) must be explicitly authorized in its Home Country to provide direct lending.
• 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 is to be assessed via an ad hoc declaration to be issued by the AIF’s Home Country Regulator. In this respect, we anticipate difficulties in obtaining from the latter regulator anything beyond the fact that the relevant foreign AIF has been approved and registered as an AIF in its Home Country in accordance with relevant AIFMD implementing provisions.
• Most importantly, the intention to provide direct lending must be notified to the Bank of Italy before the start of the activity in Italy and the Bank of Italy can deny its approval within the following 60 days.

Also, AIFs (including domestic AIFs), despite direct lending only being permitted toward non-consumers, shall comply with the Bank of Italy provisions on transparency, similarly to any banking institution providing lending. This will result in a significant investment in brand new infrastructure and set of documentation, from on-boarding to execution and on an on-going basis in terms of reporting.

Finally, AIFs shall in any event wait for the Bank of Italy to issue secondary regulation, in the absence of which, even those AIFs willing to operate in Italy notwithstanding the above additional regulatory burden, will not be able to initiate the process enabling them to do so.