By Conor Durkin and Liane Müllers in the Financial Services Team of Mason Hayes & Curran.
Loan Origination
Ireland was the first EU Member State to introduce a specific regulatory framework for loan origination funds. A loan origination fund (in Ireland referred to as a loan originating qualifying investor AIF or L-QIAIF) is a vehicle which is ideally suited to match the investment requirements of institutional investors and corporate borrowers.
In March 2017 the Central Bank of Ireland (“Central Bank”) introduced significant enhancements to the Irish loan origination regime, including the ability for L-QIAIFs to acquire high yield instruments and to acquire equity investments in those borrowers which the L-QIAIF has granted loans. The recent enhancements are consistent with the central aim of the Capital Markets Union, which is the promotion of alternative sources of non-bank lending to the EU economy. The European Securities and Markets Authority (ESMA) is currently consulting on the relevant product features that should be harmonised to facilitate the development of a pan European framework for L-QIAIFs. Fortunately, L-QIAIFs, as currently designed, comply with the key product features that have been identified by ESMA, therefore it is expected that L-QIAIFs should comply with future policy recommendations that the Commission is expected to develop.
Central Bank Discussion Paper on ETFs
Exchange traded funds (ETFs) are the fastest growing type of investment fund globally, representing more than $4 trillion in assets globally as at the end of April 2017 and in the global context Ireland is the largest domicile for European based ETFs.
On 15 May 2017, the Central Bank published a Discussion Paper (the “Discussion Paper”), which considers the distinctive features of ETFs and how they operate in both stressed and normal market conditions. Recognising the size and the importance of the ETF industry, the Central Bank is committed to providing appropriate regulation and in maintaining the best in class regulatory landscape for ETFs.
In its Discussion Paper the Central Bank requests feedback from industry on the market liquidity operations of ETFs, the primary and secondary trading activities of ETFs and the systemic risk factors posed by ETFs. Stakeholders are encouraged to provide their views on the operation of the ETF sector by 11 August 2017. Industry feedback will be used by the Central Bank to support it in continuing to authorise and effectively supervise ETFs in the current environment and as the ETF industry further develops, to better inform the Central Bank’s participation at EU level. This is hoped to contribute to more influential international discussions.
ESMA Opinion on UCITS Share Class
At present there are diverging approaches among Member States as to the different features that share class of a UCITS may have. On 30 January 2017, the European Securities and Markets Authority (ESMA) published an opinion on the extent to which share classes of a UCITS can differ from one another (the “Share Class Opinion”).
While the UCITS Directive recognises the possibility to establish different share classes, there are no rules on whether, and to what extent, share classes of a given UCITS may differ from one another. The Share Class Opinion seeks to resolve this by setting out four high-level principles that share classes must observe, namely:
- common investment objective
- non-contagion between share classes
- pre-determination so that all features of a share class is determined before it is set up
- transparency so that the differences between share classes are disclosed to investors.
ESMA considers that hedged currency share classes comply with these principles whereas share classes that apply a derivative overlay strategy such as interest rate hedging are not compatible with the requirement that all share classes of a UCITS have a common investment objective.
These principles are broadly in line with the Central Bank’s current regulatory treatment of share classes. While the Share Class Opinion is not legally binding, it is expected to be adopted by the Central Bank as part of its supervisory practices.
Brexit
The Central Bank has advised that it has seen a significant number of Brexit related enquiries from UK firms who are considering establishing operations in Ireland. In its approach to regulatory supervision the Central Bank has confirmed that firms establishing in Ireland will need to demonstrate compliance with EU and Irish authorisation requirements. The Central Bank expects firms that run their business from Ireland and that have a substantive presence (meaning the mind and management of the firm) will need to be located in Ireland. In relation to outsourcing, the Central Bank wants to see that there is the level of expertise and seniority within the entity to effectively oversee and manage such outsourcing.
At the end of May 2017, ESMA issued an opinion outlining the general principles to be adopted by national regulators in order to support EU-wide supervisory convergence regarding the approval and prudential regulation of firms relocating to the EU as a result of Brexit. The Central Bank no doubt will apply ESMA’s general principles in relation to its review and supervision of applications by UK firms seeking to establish operations in Ireland. ESMA has also indicated that it intends to develop sector-specific opinions for asset managers and investment firms, such sector specific opinions will be of much relevance in the context of Brexit as it will impact the extent to which an EU subsidiary or branch of a UK firm may delegate functions to its UK parent.
Many UK firms use Irish funds for distribution in the EU and the Irish funds industry has been and will continue to be a strong partner of UK-based asset managers. The Central Bank has advised that it is committed to meeting the challenges posed by Brexit and is prepared for the potential large volume of applications that may follow, depending on the outcome of Brexit negotiations.
Market Trends
The Irish investment funds industry continues to grow and the number of new fund authorisations for 2017 shows a steady throughput. The Irish market place is seeing continued growth in asset classes such as:
- ETFs, with increasingly ETFs being established that track more esoteric asset classes
- credit funds, and funds providing exposure to high yield and mezzanine debt, including loan origination funds
- pension pooling products that utilise Ireland’s pension pooling vehicle referred to as the common contractual fund
- Irish real estate funds – this remains buoyant, with the focus broadening to include more niche sectors such as residential developments, student accommodation, healthcare and regional office and retail park developments.
About the Authors
Conor is a partner in the Mason Hayes & Curran Financial Services Team specialising in the field of investment funds and asset management. He regularly advises leading international asset managers on carrying on business in Ireland and in particular on the establishment, structuring and operation of all types of collective investment schemes. Conor has significant experience in advising investors, promoters, fund managers and investment banks on the ongoing operation of traditional and alternative investment funds including UCITS, hedge funds, funds of funds and private equity funds.
Liane advises clients on the establishment, authorisation, operation and maintenance of Irish regulated funds including UCITS, non-UCITS and hedge funds. Liane also advises a variety of fund service providers, including administrators and depositaries, on various issues and on all regulatory issues pertaining to funds.