The Post-Brexit Future of the UK’s Securitisation Regime Takes Shape

As part of the UK’s post-Brexit regulatory reforms, the UK government is working to repeal and replace retained EU financial services law with new domestic rules – this includes the UK’s onshored version of the Securitisation Regulation (UK SR).

The UK government recently published a draft statutory instrument (SI) to replace the UK SR. Many of the key obligations thereunder, including risk retention, transparency and due diligence will remain, but the SI leaves the details of the majority of the rules to the UK regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) (together, the Regulators). The Regulators will implement the rules through each of their respective rulebooks. 

The PRA launched a consultation on its proposed firm-facing rules on 27 July 2023 and the FCA launched its parallel consultation on 7 August 2023. (The rulebooks of the FCA and the PRA cover different entities, hence the separate consultations.) While there will therefore be some duplication between the two rulebooks, the Regulators noted that they have coordinated their approach with a view to creating a coherent framework.

The consultations generally propose to retain the existing onshored laws save for some targeted adjustments. Annex 4 of the FCA’s consultation sets out a useful overview of derivations and changes from the UK SR, and the key proposals include the following:

• Due diligence. The Regulators propose that Article 5(1)(e) and 5(1)(f) of the UK SR are replaced with a “more principles-based and proportionate approach”. Article 5(1)(e) and 5(1)(f) of the UK SR currently require a potential investor to verify that certain information will be disclosed in accordance with the requirements of Article 7; the applicable disclosure requirements differ between UK and non-UK securitisations. The proposed rules would require UK institutional investors to verify that a manufacturer of a securitisation has made available sufficient information to enable the investor to assess the risks of holding the securitisation position, with no distinction in such verification obligations between UK and non-UK transactions. UK institutional investors would need to receive at least the information listed in the rules adopted by the Regulators, including a commitment by the manufacturer to make further information continually available, as appropriate.
• Timeline for availability of Article 7 information. Article 7 of the UK SR currently requires manufacturers to make the information specified in Article 7(1)(b) to (d) available “before pricing”. The Regulators recognise the inherent difficulties in complying with this timeframe and therefore propose that this information should first be made available to investors before pricing at least in draft form, with final documentation provided within 15 days of the transaction closing.
• Risk-retention. The proposed rules would amend and clarify risk retention provisions for the securitisation of non-performing exposures. The proposed rules include an exception to complying with ongoing risk retention requirements in the event of insolvency of the retainer and an exception to the restriction on cherry-picking of assets by originators. The proposed rules also provide clarity on the “sole purpose” test for entities retaining risk and on re-securitisations, and extend the scope of the cash collateralisation exemption for a synthetic/contingent form of retention.
• Reporting templates. The Regulators suggest that the Article 7 reporting templates could be amended to be made more proportionate, especially for “private” transactions, meaning those for which an approved prospectus is not required under UK law. The consultations also include a discussion on the distinction between public and private transactions. The Regulators plan to publish a second consultation at a later stage, covering an assessment of any proposed changes to the definition of public and private securitisations along with proposals for related changes to the reporting regime. 

The consultations both close on 30 October 2023. The final rules are expected to be published in the second quarter of 2024 and implemented shortly thereafter.

The draft SI, PRA consultation and FCA consultation are available here, here and here, respectively.