legal framework for microfinance funds in europe why is it crucial? how to move forward?
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LEGAL FRAMEWORK FOR MICROFINANCE FUNDS IN EUROPE Why is it crucial? How to move forward? Luxembourg November 25, 2009. Summary. Presentation of the E-MFP Action group Challenges of microfinance funds regulation Microfinance context and need for regulation - PowerPoint PPT PresentationTRANSCRIPT
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LEGAL FRAMEWORK FOR MICROFINANCE FUNDS IN EUROPE
Why is it crucial?How to move forward?
LuxembourgNovember 25, 2009
[email protected] www.e-mfp.eu
A.Presentation of the E-MFP Action group
B.Challenges of microfinance funds regulation1. Microfinance context and need for regulation2. Exceptions and models: Luxembourg and the
Netherlands3. Issues to be addressed
C.Different solutions & comparative analysis1. Regulation under AIFM Directive2. Regulation under UCITS V3. Specific microfinance regulation4. Comparative analysis
Summary
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European Microfinance Patform (E-MFP)
Action Group
EMFP Action Group: 19 members from 5 countries, representing almost $2 billion assets under management in microfinance and 23.5 million retail & private investors .
European Microfinance Platform (E-MFP) founded in 2006 is a network of 119 organizations and individuals active in the area of microfinance. Its objective is to promote co-operation amongst European microfinance bodies working in developing countries.
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A. Challenges of microfinance funds regulation
1. Microfinance context and legal environment
2. Luxembourg and the Netherlands as exeptions
3. Specific issues to be addressed
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No regulation = law of the jungle
Importance of the creation of an equal level playing field within the European Union
Demand of retail investors for microfinance products
Necessary protection of the retail investor
Social impact in developing countries (4 billion individuals concerned)
Microfinance as a way forward in the social crisis in Europe
European expertise in Microfinance (Banks & Asset Managers, NGOs)
Why regulation of microfinance
funds at EU level is crucial
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Investing in Microfinance: a new
type of asset class
Best In Class Thematic (e.g. : environmental) Microfinance Debt Microfinance Equity
Approach
Selection of companies with the best social, environmental and corporate governance practices
Selection of companies whose products or services benefit directly to the improvement of the environment or society
Selection of Microfinance Institutions (MFIs) whose aim is to contribute to financial inclusion.
Investment Universe Mainly Large Caps Multi-sectors
Mainly Mid Caps 1 specific sector NGO / Financial Institutions
Nature of underlying assets Listed Listed or non listed
(private equity)
Non Listed companies Non Listed instruments (Promissory notes)
Mainly Non Listed (Private Equity)
Categories of Investors All Mainly Private banking
(HNWI) Institutional, HNWI, Retail Private Banking, HNWI
Profitability Close to the benchmark
Higher than the benchmark Small profitability High profitability
Volatility Close to the market From limited to high Low (<1%) NA
Social and economic impact Medium High High
Underlying Risks Low From low to high Low by experience High
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Microfinance as a tool of positive contribution to financial inclusion and poverty reduction. As of June 2009, microfinance represents $50 billion assets for an estimated number of 10,000 microfinance institutions (MFIs).
There are more than 100 funds in the world which finance $6.6 billion to MFIs (75% in debt instruments). Currently 34% of the fund investors are retail clients.
The current regulation on general investment funds (UCITS1 3 and 4 directives) as the major obstacle for the development of microfinance funds:
Investment instruments in MFIs are not “transferable securities and money market instruments admitted to or dealt on a regulated market” (i.e. listed) as required by the regulation.
Microfinance Funds instruments are not adequate for daily publication of their Net Asset Value (NAV) as required by the UCITS regulation.
Microfinance Funds are not liquid enough to be able to cope anytime with redemptions demand from investors as required by the current regulation.
1 Undertaking for Collective Investment in Transferable Securities
Context and Current SituationMost European countries have only limited options to promote and distribute microfinance funds at the retail level.
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The Netherlands and Luxembourg have allowed for fund structures licensed by the national regulator, without falling under the scope of the UCITS directive.
Exceptions of Luxembourg and
the Netherlands
The Netherlands Regulation
- Promotion of SRI through the implementation of Green Funds
- Tax break of 2.5% of the amount invested
- National distribution to institutional, private and retail investors
Luxembourg Regulation
- Flexible Investments Vehicules through the law on « Part II » Funds or the law on SIF (Specialised Investment Funds)
Part II Fund
- Distribution to Institutional and private investors
SIF
- Fiscal incentive- Distribution to Institutional and private investors
36% of the AUM
15% of the AUM
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Main Issues to be addressed
Main issues regarding products (UCITS):
Consider promissory notes as valid debt instruments for funds
Adapt the valorization method to microfinance assets (debt & equity)
Regulate risk diversification (number of countries & MFIs)
Define a regulatory allowance of microfinance in the fund (at least 50%)
Define a category of acceptable MFIs (for example rating)
Main issues regarding asset managers (AIFM): Flexible supervision for funds manager
Main issue regarding national regulation:
Taxation issues: tax break / withholding tax
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B. Different ways to regulate at the EU level
1. Regulation under AIFM directive proposal
2. Regulation under UCITS V
3. Specific microfinance regulation
4. Comparative analysis
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Decision procedure under European Directive
FIRST READING
SECOND READING
THIRD READING
COMMISSION
PARLIAMENTCOUNCIL
1 Presentation of the legislative proposal simultaneously to Parliament and Council 2 Parliament adopts amendments
and submits them to the Council
3 If the Council agrees with the outcome of Parliament, the legislative text is adopted.
5 Parliament may approve the common position and the text is adopted.
5
32
1
4
66 Parliament may table amendments to the common position. In this case, the Council can approve Parliament’s amendments and the legislative text is adopted.
8
7
7 If the Council reject the amendments, a Conciliation Committee is created (27 members of Parliament + 27 members of the Council).
8 The Conciiliation Committee adopts a joint text which is submitted to the Parliament and the Council.
CONCILIATION COMMITTEE
4 If the Council does not accept Parliament’s first reading vote, it draws up a common position.
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Different ways to regulate:
European Directive on AIFM
AIFM1 directive proposal (April 2009) aims create a common set of rules in terms of licensing and supervision for European investment managers of non-UCITS invesments funds.
Once licensed as Alternative Investment Funds (AIFs), the funds will benefit from a European Passport for cross-border distribution to EU professional investors.
Main features (especially regarding microfinance):
• Creation of a European passport for microfinance funds• Indirect regulation: regulation of the managers rather than the products• Wide scope: regulation covering many different types of funds (hedge funds, private equity funds, etc.)• Insufficient consistency with other EU regulations, especially with UCITS directives• Not allowing distribution for retail investors: professional investors only• Short or mid-term solution
1 Alternative Invesment Fund Managers
Different solutions: AIFM Directive
UCITS V
Specific Regulation
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Different ways to regulate:
Regulation under UCITS V
Different solutions: AIFM Directive
UCITS V
Specific Regulation
Main features (especially regarding microfinance):
• Creation of a European passport for microfinance funds
• Direct regulation: regulation of the funds themselves• General scope: regulation covering all the invesment funds without
taking into account specificities of the microfinance sector
• Allowing distribution for retail investors• Long term solution
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Different ways to regulate:
Building of a specific regulation
Main features (especially regarding microfinance):
• Creation of a European passport for microfinance funds
• Direct regulation: regulation of the funds themselves• Specialized scope: regulation covering only microfinance funds and
taking into account specificities of the microfinance sector• Allowing distribution for retail investors• Long term solution
Different solutions: AIFM Directive
UCITS V
Specific Microfinance Regulation
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Solutions
Achievement in terms of
coherence and opportunities
Actors concerned by the regulation
Outreach & distribution
Position regarding
microfinance & its specific
features
Current SituationNo harmonization
or EU passport « law of the
jungle »
Depending on national
regulations
Institutional & private investors Not specialised
AIFMEU passport & acces to cross-border market
Asset managers (investment managment companies)
Institutional & private investors Not specialised
UCITS VEU passport &
access to cross-border market
Funds (invesment products)
Institutional, private & retail
investorsNot specialised
Specific Microfinance Regulation
EU passport & access to cross-
border market
Funds (invesment products)
Institutional, private & retail
investorsSpecialised
Comparative Analysis regarding
regulation objectives
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Contacts of the Action Group
Emmanuel de Lutzel – Chairman Head of BNP Paribas Microfinance Group
[email protected]+33 1 43 16 81 39
Loïc de Cannière – Co-chairman Managing Director of Incofin Investment Management
[email protected]+32 3 829 25 62
Bernard Coupez – Special Adivser BNP Paribas Asset Manager in charge of regulatory monitoring
[email protected]+33 1 58 97 29 89
Christoph Pausch Executive Secretary of the European Microfinance [email protected]+352 26 27 13 55