ESMA published its 'opinion' addressed to the European Parliament, Council and Commission as part of its work on the Capital Markets Union (CMU), it said.
Loans from investment funds to borrowers such as small and medium enterprises could provide an alternative source of finance for the market, ESMA said. Known as 'loan origination', this is encouraged under the CMU, it said.
Several countries including Germany, Ireland, Spain, Italy and Malta have set up their own frameworks for alternative investment funds based in their jurisdictions, all with different requirements, and France is in the process of consulting on changes to its regulation to cover loan origination by funds. A common EU approach would create a more level playing field for funds, reduce 'regulatory arbitrage', where funds choose the most favourable countries, and generally encourage lending, ESMA said.
Loan origination is currently only possible for alternative investment funds (AIFs), ESMA noted Other funds, known as UCITS, or undertakings for the collective investment in transferable securities, are prohibited from giving loans or acting as a guarantor.
In its work on a framework, the Commission "should look at the existing national approaches and regimes, as well as consider the exemptions for a number of fund types which are currently in place in member states, such as for private equity funds, venture capital funds, or hedge funds," ESMA said.
The Commission should also consider introducing authorisation for funds and their managers, allowing national authorities to assess their capabilities and monitor any impact on systemic risk, ESMA said. This will help to protect the interests of both borrowers and investors, it said.
Whether it includes authorisation or not, the framework should make sure that national competent authorities have powers to monitor, supervise and enforce the requirements set for managers and their funds, it said.
Fund management expert Daniel Greenaway of Pinsent Masons, the law firm behind Out-Law.com said: "The initiative to harmonise the regulatory regime for debt funds should be welcomed as the number of funds in the space continues to grow. This increased focus on the benefits of new alternative lenders entering the market should also lead to a focus on the harmonisation of relevant tax laws so that these funds can be established and operated more efficiently across all EU jurisdictions."
ESMA was established in 2011 to protect investors and promote stable, well-functioning financial markets in the EU.