New UK securitisation framework demonstrates new approach to rulemaking

Their proposals cover the revised regulatory rules needed to implement the new UK securitisation regulatory framework, in line with the so-called ‘Edinburgh reforms’ and ‘Mansion House reforms’, and under the comprehensive FSMA model established by the 2023 Financial Services and Markets Act. The creation of a new UK securitisation regulatory regime under the FSMA model means that the bulk of the firm-facing provisions will sit within PRA and FCA rules, alongside the new UK Securitisation Regulation.

Reflecting the shared supervisory responsibility for the securitisation regulatory framework, the regulators are now consulting on those aspects of the securitisation regulatory regime for which they each have responsibility. The PRA is consulting for PRA-authorised firms on rules on due diligence, risk retention, transparency, re-securitisation and credit-granting. At the same time, the FCA is consulting FCA-authorised firms and unauthorised firms on rules concerning risk retention, transparency and re-securitisation, due diligence rules for certain firms, rules for securitisation repositories and third party verifiers, as well as rules relating to ‘simple, transparent and standardised’ (STS) securitisation for all UK originators and sponsors. Both regulators’ target date for the implementation of these changes is the second quarter of 2024, subject to the new UK Securitisation Regulation being in application by then.

The regulators’ consultations show the direction of travel that is proposed to be taken to implementing the UK’s post-Brexit regulatory regime for securitisation. The market’s response will be interesting given that one of the most contentious aspects of the framework to date – the reporting requirements – are not to be considered in detail until a later date. As one of the first areas of reform to be prioritised under the Edinburgh reforms, the new securitisation regime is indicative of the UK’s new approach to rulemaking, while remaining close to its roots in the EU regime.

The PRA consultation

The PRA’s consultation, published late last month, is open for comment until 30 October. The proposals focus on new rules to replace certain provisions of the existing, EU-derived Securitisation Regulation and accompanying technical standards. They cover due diligence, risk retention, transparency, the ban on re-securitisation, criteria for credit-granting and transitional provisions, setting out new rules to accompany the new UK Securitisation Regulation.

While the PRA notes that replacing these will largely preserve the current, EU-derived, requirements, several targeted adjustments are proposed to the PRA rules that would, under the new regime, comprise:

• a new securitisation part of the PRA Rulebook;
• changes to the existing supervisory statement 10/18 (SS10/18); and
• a new statement of policy on permissions for re-securitisations.

The targeted adjustments to the framework proposed by the PRA would clarify the ‘person scope’ of the requirements on ‘manufacturers’ – which is shorthand for securitisation originators, original lenders, sponsors and securitisation special purpose entities (SSPEs) as defined in the PRA and FCA rules. The clarification would help to ensure that all PRA-authorised manufacturers who are established in the UK are subject to relevant requirements – which also captures one-off securitisation activity. The proposals also set out expectations for them.

Due diligence

The PRA has proposed taking a “more principles-based and proportionate” approach to due diligence obligations on PRA-authorised institutional investors including in relation to the crucial Article 5(1)(e) and (f) on the verification of disclosure by UK and non-UK manufacturers. A new ‘sufficient information’ standard would replace the current more prescriptive requirements, so that information on underlying exposures and the structure of the securitisation would be required, along with a commitment by the relevant manufacturer to make further information available on an ongoing basis as appropriate, but not the full detail currently required by Article 7 and the associated Disclosure Technical Standards.

This proposed principles-based approach to due diligence will be welcomed by market participants as having the potential to reduce time and costs, and is expected to eliminate the existing uncertainty over the scope of due diligence required by UK investors to invest in third country securitisations.

In addition, the PRA proposes clarifications around the delegation of due diligence to ensure that delegating parties are not liable for a managing party’s non-compliance with its due diligence obligations, where that managing party is subject to equivalent PRA or FCA due diligence rules.

Risk retention rules

The existing risk retention rules would largely be preserved in PRA rules, but some minor changes include provisions that would allow a change of retainer and transfer of the retention. These would only apply, however, in the event of the retainer’s insolvency. In addition, the rules also include criteria to assess the ‘sole purpose’ test, clarification that the ‘two-level’ risk retention is not required in certain re-securitisations, and clarification of the meaning of ‘comparable assets’ in the ‘cherry-picking’ rule. The rules would also allow all CRR and Solvency II firms to avail themselves of the ability to retain on a synthetic or contingent basis without the need to cash collateralise or segregate the holding.

The market will likely be glad to see the back of the 2014 EU risk retention RTS which are still in existence pending the European Commission’s approval of a revised version. It is also helpful that the PRA’s proposed changes reflect many of the key aspects of those new RTS.

Amendments to the risk retention provisions would also be made for securitisations of non-performing exposures (NPEs) to allow the use of the ‘net value’ of NPEs, reflecting the discount to the nominal value that is typically factored into their purchase price. No other changes for NPEs are being considered at this stage, so the PRA is not planning to align these aspects of the risk retention rules with the amended EU securitisation regime.

Other proposed changes

The PRA’s adjustments would also clarify timelines for manufacturers making various disclosures, so that the current requirement to make certain information available ‘before pricing’ will be replaced with more helpful wording requiring it to be made available before pricing at least in draft or initial form, and the final documentation to be made available at the latest 15 days after closing.

The new statement of policy for re-securitisations also clarifies that the PRA will use a new power under FSMA to permit re-securitisations only in circumstances broadly similar to those which it can currently grant permission – under article 8(2) of the existing Securitisation Regulation, which is not being preserved by the new UK Securitisation Regulation.

As for the disclosure rules and templates, the PRA does not propose any changes, but notes that it may consult on proposals in this area in a future consultation paper. Giving an overview of the transparency rules under consideration, the PRA notes that these include the distinction between public and private securitisation – in particular how it may be redrawn – and the associated transparency requirements.

The PRA said these requirements could be made more proportionate for private securitisations and adjusted, possibly in a more limited way, for public securitisations. Transitional provisions under the existing Securitisation Regulation preserve the existing joint PRA and FCA Direction on private disclosure and the proposed rules do not replace this. The FCA’s consultation also briefly discusses the reporting regime but leaves the issue to be dealt with in a further consultation paper expected to be published later this year.

This plan to review the disclosure regime, including the possibility that private securitisations could be subject to a lighter-touch disclosure regime, aligns with the EU’s plan under which the European and Securities Markets Authority has been tasked with reviewing the EU disclosure templates and proposing a revised template for private deals, meaning that the EU and UK disclosure regimes could be both lighter-touch, and helpfully aligned in future.

The FCA consultation

The FCA’s consultation (707 pages / 530MB PDF) was released on 7 August and, like the PRA consultation, is also open for comment until 30 October 2023. The FCA’s focus is on largely preserving the current requirements and making some adjustments, with the aim of making the securitisation regulatory framework more proportionate, removing barriers to the issuance of and investment in securitisation, enhancing investor protection, minimising costs, and creating a clearer and more agile framework for the securitisation market. 

Notably, the FCA’s draft rules represent a more thorough redraft of the existing, EU-derived rules than the PRA’s rather more ‘copy-out’ approach. Despite this, and taking into account the regulators’ new obligation under FSMA to “have regard” to the coherence of the overall regulatory framework for securitisation, the FCA suggests that the regulators have coordinated their approach to the replacement of the firm-facing rules with the regulators’ new rules and other material, and the proposals they have consulted upon are intended to create a coherent framework for regulating securitisation in the UK.

Public and private securitisation

Significantly, the FCA is leaving the important changes to the reporting regime, and the distinction between public and private securitisation, to be consulted on in a further consultation paper which is expected to be published later this year. As a result, no changes are proposed to the existing set of reporting templates in this consultation paper that will affect how firms populate or submit the templates.

The later consultation will consider feedback received to the areas outlined for discussion in the current consultation, which focuses on two potential issues: the current definition of a ‘public’ securitisation – those for which a prospectus is published, and consequently, broadly speaking, those admitted to trading on a UK regulated market – and the proportionality of the reporting requirements. In particular, it will examine requirements for private securitisations, especially when taking into account that the definition of ‘securitisation’ catches a broad range of transactions.

As for the distinction between public and private securitisation, having considered three possible options, the FCA proposes maintaining the current description of public securitisation, but expanding it to cover securitisations that are public in terms of being recognised by the market as publicly distributed and traded transactions. This would mean the definition would cover:

• UK securitisations that are subject to primary listings on UK regulated markets or appropriate equivalent non-UK venues;
• primary admissions to trading on a UK Multilateral Trading Facility (MTF) and similar non-UK venues where there is at least one UK manufacturer; and
• securitisations involving at least one UK manufacturer where “a public announcement or other general communication is made to a wide audience of potential investors, intended to solicit orders or expressions of interest as part of the primary marketing of the securitisation.”

Amending the definition of a ‘public’ securitisation in this way could bring securitisations listed on EU-regulated markets and MTFs, such as Euronext Dublin’s Global Exchange Market, within its scope.

Disclosure templates

Regarding disclosure templates, both regulators are considering whether more proportionate or principles-based templates for private securitisation could be introduced. Encouragingly, both regulators go further than expected, suggesting that adjustments – albeit more limited in nature – to the disclosure templates for public securitisations may also be appropriate. The FCA’s work in this area will also take into account ESG-related disclosures. With the EU disclosure templates also currently under review, it may be that the new UK templates will closely resemble the new set of EU templates in future.

Other proposed changes

The consultation paper sets out the aspects of its rules on which the FCA is proposing amendments at this time, which include adjustments to the due diligence and risk retention rules, largely reflecting the proposals outlined by the PRA above. In both cases, the FCA notes that it may consider further changes to rules in these areas in its second consultation, leaving the door open to further possible changes based on the feedback received to this consultation.

Other changes would expressly limit the geographical scope of the FCA’s rules to entities established in the UK, apart from the definition of ‘institutional investor’ which is set out in the new Securitisation Regulation, and replace references to euros with sterling. They would also clarify the meaning of ‘established’ in the UK, require that a securitisation meeting all the STS criteria need only be notified to the FCA if the STS label is sought, and make changes to the homogeneity rules.

In addition, the FCA plans to replicate the new UK Securitisation Regulation’s ban on re-securitisation in FCA rules, without specifying in detail how its powers would be used, and to clarify that the credit-granting criteria need not be met with respect to trade receivables not originated in the form of a loan.

FCA sourcebook

Many of the FCA’s proposed rule-changes use the rulemaking powers of FSMA’s new Designated Activities Regime (DAR) as it applies to securitisations, such as the restriction on selling a securitisation position to a retail client in the UK. The FCA’s proposed rules for STS securitisations are also made using the DAR powers and these are set out in detail in a new securitisation sourcebook, having been translated into handbook text from the existing UK Securitisation Regulation, along with the STS notification requirements. The FCA leaves the detail of how possible ‘no action’ relief may be granted under the DAR to be dealt with at a future date.

The rules for due diligence, risk retention and transparency – including the as-yet unamended disclosure templates and criteria for credit-granting – are also among the rules set out for consultation in the sourcebook. The FCA also has rule-making powers in relation to securitisation repositories and third-party verifiers, and these rules are also set out in the sourcebook. Other provisions, such as the ‘equivalence’ framework for third country securitisations under the STS regime, are contained in the legislative framework of the new Securitisation Regulation and may be supplemented by HM Treasury with further regulations designating equivalent jurisdictions.